Chief Investment Office Americas, Wealth Management US Consumer … · 2018-06-26 · Consumer durables & apparel: Most Preferred Prefer to own global brands in the athletic category

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US Consumer DiscretionaryEquity preferences | 15 June 2018

Chief Investment Office Americas, Wealth ManagementRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas, [email protected],

Jonathan Woloshin, CFA, Head Americas Equities, [email protected],

Sally Dessloch, Head Equity Sector Strategy Americas, [email protected]

Sector view: Neutral

Strategy: Our equity strategy team recommends a Neutral allo-cation to the sector as important segments of the consumer dis-cretionary sector such as autos, housing, and lodging tend to per-form best early in the cycle. Also, the Federal Reserve's interest rateincreases could become more of a headwind for these interest-ratesensitive industries.

Our positioning within the sector: We are attracted to strongbrands/content with pricing power and companies that are alignedto the needs of the millennial consumer given the outsized impactthat this demographic will have on consumption trends for years tocome. In addition, we look for companies with leading e-commerceand omni-channel capabilities and international exposure, particu-larly within the emerging markets.

Sector Benchmark: S&P US Consumer Discretionary Index

Consumer durables & apparel: Most PreferredPrefer to own global brands in the athletic category that are notoverexposed to the US department store sector.

Consumer services: Most PreferredMacro tailwinds should help support consumer spending andcommodity deflation is largely helping to offset rising wage inflationat restaurants.

Retailing: NeutralWe prefer off-pricers and companies that are tied to homeimprovement spending. Upcoming holiday season should onceagain be very competitive.

Automobiles & Components: NeutralEconomic conditions, age of fleet supportive of continued soliddemand at or near current levels. Sub-sector unlikely to outperformbenchmark at this stage of the cycle.

Name Ticker PriceMost PreferredAmazon.com Inc. AMZN1723.86D.R. Horton Inc. DHI 43.08Home Depot Inc. HD 199.67Hyatt Hotels Corp H 83.00Lowe's Cos. LOW 99.16McDonald's Corp. MCD 167.05Meritage Homes Corp. MTH 46.00Nike Inc. NKE 74.70Pulte Homes Inc. PHM 30.80Walt Disney Co. DIS 108.75

Bellwether ListComcast Corp. (Cl A) CMCSA 33.82Dick's Sporting Goods Inc. DKS 37.40Ford Motor Co F 11.89Gap Inc. GPS 31.33General Motors GM 43.57Hilton Worldwide HLT 82.93Lennar Corp. (Cl A) LEN 53.07Lions Gate Ent Class A LGF.A 25.04Lululemon Athletica LULU 125.88Macy's Inc. M 37.56Marriott International Inc. MAR 138.75Nordstrom JWN 49.87Starbucks Corp. SBUX 57.02Toll Brothers Inc. TOL 39.05Under Armour Inc. UA 21.73VF Corp VFC 84.03Viacom Inc. (Cl B) VIA.B 28.91Williams-Sonoma WSM 60.85Yum! Brands Inc. YUM 83.38

Source: Bloomberg, UBS as of 14 June 2018

This report has been prepared by UBS Financial Services Inc. (UBS FS). Analyst certification and required disclosuresbegin on page 48.

Media: NeutralInvestors continue to be very bearish on the pace of cord-cutting, themigration to skinny bundles and the shift in advertising dollars fromTV to online. We prefer to own large-cap companies that possess"must-have" content and live sports programming.

Consumer Durables & Apparel

Have you ever wondered what is the fastest growing spectator sportin the world? The NFL? No. NBA? No. Premier League Football?Wrong again. eSports, or competitive video gaming, has taken theworld by storm and is now the fastest growing spectator sports in theworld. Given the demographics that eSports cater to millennials andgen Z — and the global reach of gaming, we are likely still in the veryearly innings of growth.

Let's dig a little bit deeper into the numbers. According to a recentreport by Newzoo, a market intelligence firm in eSports, games andmobile intelligence, the global eSports audience will reach 380 millionin 2018. This number comprises 165 million enthusiasts and 215 mil-lion occasional viewers. Already, eSports have a larger audience thantwo of the major sports leagues in the United States (MLB and NHL).And eSports revenues are growing alongside viewership. Accordingto Newzoo, the global eSports economy will grow to over USD 900million this year, or year-over year growth of almost 40%. The major-ity of these dollars come from advertising, sponsorship, media rightsand content licenses.

People are watching these events both in-person and streamingonline. eSports arenas in California, Las Vegas and Seoul, South Koreahave all hosted sold out tournaments and events. However, the bigviewership numbers come online where several million people watchthrough streaming services such as Amazon's Twitch. Just recently,628,000 viewers tuned in to watch the musician Drake play the gameFortnite with several of his friends. And if you think that number is big,it's nothing compared to the almost 74 million viewers who watchedthe League of Legends World Championship 2017.

So what are the most popular eSports games? Blizzard's OverwatchLeague (owned by Activision) is at the top of the list with 12 teamscompeting for a total prize pool of USD 3.5 million. Interestingly, theseteams are branded and localized to a geographic area with team own-ership ranging from Bob Kraft (owner of the New England Patriots) toKroenke Sports and Entertainment (owners of the Los Angeles Rams,Denver Nuggets and Arsenal FC). Players have to be at least 18 yearsold and salaries range from USD 50,000 to USD 150,000 — not tooshabby for playing video games for a living. Other popular gamesinclude Call of Duty and League of Legends.

If you have kids that play video games, there is a very good chancethat they are playing Fortnite. In February, a record 3.4 million peopleplayed the game all at once and the overall user base has surpassed45 million. While the game itself is free to download, its developer,Epic Games, is raking in the cash earning more than USD 100 milliona month through in-game purchases. While Fortnite is not an eSports

US Consumer Discretionary | Equity preferences

CIO Americas, WM 15 June 2018 2

game yet, we can envision a league sometime in the near future giventhe game's popularity.

For now, it is in the very early stages of eSports growth but the futureis very bright. Investment implications range from video game pub-lishers and technology companies to media conglomerates looking tolatch on to this new form of entertainment.

So if you happen to have a 13-year old child at home who can't getaway from playing video games, perhaps it's not such a bad thing atall. Just look at Tyler Blevins, a.k.a. Ninja, who is currently making USD500,000 a month by being the most popular Fortnite player on theTwitch platform. Video games are no longer a giant waste of time.

Consumer Services

Within the fast food space, top-line results were somewhat mixedduring the first quarter as unseasonably cool and wet weathergreatly impacted results. Value continues to lead the way followingMcDonald's launch of its USD 1, USD 2, and USD 3 value campaignbut others were quick to follow suit, which may have limited theimpact from MCD's aggressive promotions. Nevertheless, customerawareness of the new menu is high and the company is excited aboutits prospects. Interestingly, the average check for transactions withthis new dollar menu is higher than for people who don't use it.

Speaking of McDonald's, the company has rolled out new fresh beefquarter pounders to all of its stores across the country. A nationaladvertising campaign began in May and early customer feedback ispositive with management noting that fresh beef cook times are fastercompared to frozen beef. It will be interesting to watch how com-petitors react but we are already seeing some chains tout that theirbeef is always fresh.

Labor pressures continue to be an important topic for restaurant man-agement teams and commentary from 1Q earnings calls made it clearthat it is likely to persist throughout 2018. Commodity costs remainrelatively tame with most companies continuing to guide to low sin-gle digits inflation with pockets of higher inflation in beef and pota-toes/fries.

Technology and delivery remain key differentiators between the havesand have-nots within the restaurant sector. Digital loyalty programsare becoming much more sophisticated and new ordering technol-ogy is making the in-store experience that much more appealing.We highlight McDonald's, Panera and Wendy's as chains that haverecently added kiosks. Finally, the benefits from delivery are actuallybeginning to show up in the numbers, with MCD suggesting thatalmost 1% of its fourth quarter US comp came from delivery sales.YUM even made a USD 200 million investment in Grubhub to expandits delivery capabilities for both Kentucky Fried Chicken and Taco Bell.



Retailing

With the CPI rising 0.2% in April, and now up 2.5% in the past 12months, consumers are paying more for everything from groceriesand home furnishings to clothing and rent. While it may appear thatprices are rising for everything these days, there are several exampleswhere we actually see pricing coming down.

Across consumer packaged goods, as many as nine categories areexperiencing lower retail prices over the past 12 months. Theseinclude razor blades, fresh milk, single-serve coffee and diapers; ineach case, prices are down low-to-mid single digits. Overall, pricingat Proctor & Gamble and Kimberly-Clark was down by 2% and 1%,respectively, in the first quarter. Heightened competition and the costof underlying commodities are the two primary reasons for thesedeclines.

Within consumer discretionary, its been reported that Amazon isdeveloping additional perks for its Prime members at Whole Foods,including a 10% discount on products that are already discounted andcash back rewards when customers use their Amazon Visa rewardscard. And if the cost of your cable bill has you at wits end, cheaperoptions are available such as skinny bundles and new live TV stream-ing services like YouTube TV. In fact, the growth of these two optionswill likely lead to a decline in cable revenues over time. Just thispast quarter, video revenue at Comcast fell 0.8% given smaller priceincreases.

So while it may feel like you are paying more for everything, we arehere to tell you that there are opportunities to spend less. With regardsto our sector preferences, our equity strategy team currently has aneutral exposure to consumer discretionary and is underweight con-sumer staples.

Housing & Homebuilders

Tax reform - Perhaps not as negative as originally fearedWhen the Tax Cuts and Jobs Act (the Act) became law, current poten-tial homeowners in high tax states sounded the alarm over sever-al provisions of the Act. Specifically, the focus was on the deduc-tion limits for state and local taxes (SALT) — including real estatetaxes — at USD 10,000 and the reduction from USD 1 million toUSD 750,000 in the maximum amount that was eligible for a mort-gage interest deduction (MID) for homes purchased after 15 Decem-ber 2017. Homeowner concerns in these states were exacerbated bythe fact that a number of these high tax states (including California,New York and New Jersey) have submarkets with home prices thatfar exceeded the national median prices for new and existing homes.Although we recognize that the limitations on SALT and MID will likelylead to higher tax payments for higher income earners that own moreexpensive homes, particularly in higher tax jurisdictions, the impactmay not be quite as severe as some fear, at least as it pertains to homeprices.



Based on our analysis, we made several high level conclusions. Weextrapolated the increase in one's tax bill under the Act as the basisfor estimating the impact to home prices.

• For median priced home in this country, there is likely to be little tono negative impact on home prices as the increase in the standarddeduction (discussed below) is likely to offset other limitations.

• Homes valued between USD 1-2 million, particularly those pur-chased pursuant to the Act becoming law, could see values neg-atively impacted by 2-3% on average. This will clearly vary byincome level and state of residence (among other things).

• For homes valued > USD 4 million, the negative impact to pricescould be as much as 4-5% on average. It is crucial for investors tounderstand that this is a broad average and will be highly sensitiveto the individual state tax rates. This is particularly true for realestate taxes. For example someone earning USD 1 million whobuys a USD 5 million home in California could see their federaltax bill increase by approximately 4.7% between 2017 and 2018.That same homeowner in New York and New Jersey could seetheir federal tax bill increase by approximately 5.6% and 9.5%,respectively, over the same period — all else being equal.

One potential wild card that is not currently able to be analyzed isthe risk of mass exodus from higher tax states to lower tax states.Although this is certainly not a new phenomenon, the potential cer-tainly exists for an increase in migration. If this were to occur it couldcertainly exacerbate some of the negative impacts discussed in thereport.

In our analysis, we assumed an interest only mortgage. Under thisscenario, a 50 basis point (one half of a percentage point) increase ininterest rates would equate to an increase of 12.5% in one's monthlymortgage payment. We estimate the tax law changes would equateto an increase in mortgage rates of 10-40 basis points from currentlevels, depending on home price. We wish to emphasize that hous-ing is a hyper-local business and that the extrapolation of this analysisto a specific home's value is challenging in that each situation hasits unique characteristics that could impact value beyond the metricsdiscussed in our report. These include, but are not limited to, emotion(a very large factor in the home buying process), the lack of under-standing of the true impacts of the Act on one's personal tax situation(this will hopefully evolve with time as more people put pen to paperand confer with their tax advisors), state of residence, locality withina state, condition of the home, and quality of the school system ina given locality.

We also recognize that a number of home buyers will opt to utilizecash for their purchase and potentially refinance post purchase with amore tax efficient vehicle such as a securities backed loan. This couldhelp mitigate some of the potential negative impacts of the Act onhome prices, particularly at the higher end. Further it is important toconsider that for many home buyers, the decision to purchase a homeis based on factors unrelated to taxes. Although tax deductibility couldpotentially influence the size/location/cost of a home purchase we donot believe the vast majority of potential homebuyers are factoring



in the tax implications of their purchase. Rather, they are focused onwhat the monthly payment will be and how that fits into their budget.

It's not all negativeOne of the key aspects of the Act as it pertains to housing residesin changes to the standard deduction and the alternative minimumtax (AMT) calculation. For the 2017 tax year, the maximum standarddeduction for married couples filing jointly was USD 12,700. Thathas been increased to USD 24,000 for the 2018 tax year. As suchmany homeowners, particularly those that represent the U.S medianin terms of income and home prices, would likely not be negativelyeffected by tax law changes with some actually seeing their tax bur-den decrease.

Changes to the AMT are likely to be more significant (and positive)for many taxpayers than originally understood. For the 2017 tax yearthe AMT exemption was USD 84,500 but began to phase out at tax-able income levels greater than USD 160,900. For the 2018 tax year,the AMT exemption is USD 109,400. However the taxable incomephase out level begins at income levels in excess of USD 1,000,000(for married couples filing jointly). As such it is likely that many fewertaxpayers will be subject to the AMT, thus somewhat softening theblow of the limitations of SALT and MID.

What about rising interest rates?The increase in 30-year conforming fixed-rate mortgage rates – fromthe 2016 and 2017 lows of 3.44% and 3.81%, respectively, to a cur-rent level of 4.6% – has a number of investors, market pundits, andpotential homebuyers concerned that increasing rates will derail thehousing recovery. We believe that it is important to put current mort-gage rates in context – in terms of history, what the absolute levelsare, and how an increase from current rates impacts affordability. Alonger view of mortgage rates provides some interesting perspective.30-year conforming mortgage rates are substantially below the long-term average of 8% and are only fractionally above the 4.13% aver-age since 2010.

In the past we have witnessed periods of rising mortgage rates and ris-ing home prices. Examining the relationship between the Case-Shiller(CS) National Home Price Index and the 30-year conforming mort-gage rate since the beginning of 1990 yields some interesting obser-vations. Despite rising interest rates in the 2003–2006 and 2013 timeperiods, the CS Index managed to log steady increases. We recog-nize that the 2005–2006 period coincided with very lax underwritingstandards that contributed to the rapid rise in homebuilding, homebuying, and home prices. However, even during the taper tantrumof 2013 that saw 30-year fixed conforming mortgage rates rise from3.41% to an August 2013 high of 4.66%, the CS Index continued toregister increasing prices.

We recognize that there is no such thing as a national housing mar-ket. In addition, we recognize the limitations of the CS Index. Wethus examined the impact of rising interest rates on a range of home



prices and incomes. In Fig. 4, we examined the impact of rising mort-gage rates on incomes of USD 60,000 (the national median house-hold income), USD 100,000, and USD 250,000. We assumed a homeprice of four times the income level (approximately the national aver-age) and a 10% down payment. As the data in Fig. 4 indicate, anincrease in mortgage rates of one full percentage point from currentlevels would represent an incremental monthly payment of only 2.6%of income levels. A 2-percentage-point increase from current levelswould represent an incremental monthly payment of only 5.4% ofincome levels. In addition, the debt-to-income ratios remain in a rangethat would likely be satisfactory to a majority of lenders.

Assessing the impact on rising mortgage rates is somewhat akin tosolving simultaneous equations. Although we are of the belief thatthe vast majority of the market can withstand rising mortgage rates(at least from an economic point of view), we recognize that thereare a number of markets where the median home price is well inexcess of the current national median price of USD 240,000. For thosemarkets where the median home price is 8x–12x household incomes(as exists in many coastal California markets as well as Manhattan),rising mortgage rates could pose a larger risk than for the majority ofthe interior of the US.

To round all of this out, despite all the hand wringing about risinginterest rates, tax law changes and declining affordability, the springselling season was generally very strong and it appears this strength iscarrying forward. The dearth of available inventory, decreasing unem-ployment, the older portion of millennial generation entering thepurchase market, increased consumer confidence and some wagegrowth have been key drivers of this strength

LodgingA funny thing happened on the way to the "end of the lodging cycle."RevPAR continues to accelerate in 2018 from 4Q 2017, group book-ings are beginning to strengthen, corporate transient travel has sofar performed better than expected, leisure travel is gaining steam,and last, but certainly not least, was the successful completion of taxreform. CIO estimates that tax reform could add 25-50bps to GDPgrowth and an additional 8+% to S&P 500 EPS growth in 2018.Improving economic activity and improving corporate earnings are anessential component of stronger RevPAR performance.

Another tailwind for the lodging industry has been the weaker dol-lar. After several years of a very strong dollar, the greenback's weak-ness against other major currencies has enhanced the affordability forglobal travelers to visit the U.S. It is estimated the in-bound travel tothe US represent some 20% of lodging demand.

Another interesting phenomenon has been the success of the majorlodging companies in migrating bookings away from online travelagencies (OTAs) directly to company websites. A direct booking is sig-nificantly higher margin business. In addition direct booking help buildbrand loyalty and help keep travelers in the hotel's ecosystem due to



the loyalty rewards programs each company maintains. The loyaltyprograms strong competitive advantage for the lodging companies.

Alas it is not all sunshine and puppies for the industry. New capaci-ty remains an issue, particularly in a number of larger, gateway busi-ness cities. Although construction financing is more difficult to comeby, there remains a fair amount of new capacity that will hit the sys-tem in 2018 and 2019. Another risk is the omnipresent AirBNB (AB).Although AB has suffered some legislative setback in several cities andthe large majority of AB clients appear to be more budget leisure-based as opposed to business based (hence lower profit customers),in our view, the industry cannot afford to be complacent as it pertainsto AB. A combination of loyalty programs and more upscale and saferaccommodations/locations/amenities combined with a vigorous lob-bying campaign at the local, state and federal level will likely be keyfor the industry to successfully defend their franchises.

Automobiles & Components

We have a neutral view of the US automobiles & components subsector. We think the industry is in the later stages of its current eco-nomic cycle, and note that the sub-sector does not tend to outper-form the consumer discretionary sector at this point in the cycle.

Thus far in 2018, US auto industry SAAR is tracking a little over 17million units, roughly in line with total US production in 2017 of 17.2million. Although last year's SAAR was down modestly from the prioryear, it ended on a high note, with SAAR climbing to 18+ million unitsin three of the last four months of the year. Some of the strengthin late 2017 was likely hurricane-related, reflecting pent-up demandas well as some initial replacement demand. So 2018 has moderatedsomewhat sequentially but is still solid. Our base case calls for pro-duction to plateau at about 17 million units in 2018, and at or nearthis level in 2019. We don't foresee a sharp downturn in this timeframe, although we acknowledge that downside risks are building.On the positive side, key drivers supporting demand include:

1. consumer confidence buoyed by wage growth and low unem-ployment;

2. a boost from tax reform for individuals resulting in more dispos-able income in the hands of low-and middle income consumers;

3. the age of vehicles in operation, which currently exceeds 11 yearson average;

4. gradual increases in housing starts;

5. continued availability of prime auto financing, with credit qualitymeasures generally consistent with historical trends at this stagein the cycle. Although subprime credit metrics have worsened,the vast majority of new cars are financed in the prime creditmarket.

6. a potential benefit to pickup truck demand if infrastructure ini-tiatives are passed.



On the other hand, signs we are watching to determine whether thecurrent cycle may be ready to roll over include:

1. used vehicle prices, which may affect affordability given that mostbuyers depend on trading in their current vehicle. As more carscome off leases, used vehicle prices could be pressured. That said,used car prices have firmed in the aftermath of the late 2017natural disasters.

2. increasing incentives, although year-to-date they seem to be ris-ing at a slower pace than in 2017;

3. Rising inventories, especially sedans (recent data show more rea-sonable levels);

4. an increase in the number of existing auto loans with "negativeequity;"

5. moderate tightening of credit standards in the auto loan market.

6. rising interest rates, which could increase the cost of vehicle own-ership. Note that OEMs could offset this by extending the lengthof loan term to keep monthly payments from rising;

7. higher gas prices, which could also affect disposable income andhence affordability, especially for lower-income consumers. Also,a sharp, sustained spike in gas prices could alter the appeal ofpick-up trucks and SUVs, although this is not our House View.

Beneficial mix shiftPickup trucks and SUVs continue to gain share at the expense of smalland mid-size cars, which has created excess supply in cars. OEMs so farhave been rational, cutting production to keep inventories in check.And average transaction prices (ATPs) continue to rise. Higher ATPsmost likely reflect the favorable mix shift to pickups and SUVs; notethat these larger vehicles tend to be more profitable. OEM profit mar-gins should be supported by this favorable mix; margins should alsoaided by savings from restructuring and productivity programs.

On the other hand, rising raw material and regulatory costs, aswell as increased investment in shared mobility, electrification andautonomous driving initiatives, could keep margin expansion in check.In addition, the recently enacted tariffs on steel and aluminum arelikely to cause a modest increase in input costs for OEMs which theymay not be able to recoup in the form of higher prices to consumers.

Trade policy an overhangAs noted above, the auto industry will feel the brunt of the new steeland aluminum tariffs. Although likely a modest headwind in terms ofincreased cost, it is up for debate whether OEMs can raise prices tocompensate. And if the NAFTA agreement were to be terminated, itcould mean higher tariffs will be levied on parts and vehicles import-ed from Mexico and Canada. A little-known provision could result ineven steeper tariffs on pickup trucks imported to the US from Mexico.This could also result in higher prices and, possibly, lower demand ifthe OEMs were to attempt to pass the higher costs through to con-sumers. It's tough to predict just how increased protectionism willaffect the industry, as outcomes differ depending on the responses



of our trading partners and the US response, in turn, to their actions.But the specter of a trade war is clearly an overhang on the stocks.

Smart mobilitySmart mobility - driving, ride-sharing and electrification - is a key areaof focus for auto industry investors, made even more so by the recentannouncement that the prominent tech investor Softbank has takena nearly 20% stake in General Motors' (GM) smart mobility arm. Inaddition, several parts suppliers have spun off their more advancedtechnologies into separate companies, which has increased investorinterest in the topic. Still, most launch targets, at scale, are general-ly 4-5 years away. While we agree that the prospect of technologi-cal disruption to the industry is truly exciting, we believe it is unlikelyto cause the OEM stocks to outperform the consumer discretionarysector benchmark in the near term. And recent news about a tragicpedestrian fatality caused by an autonomous vehicle in test mode maycause the industry to slow down its efforts. For a more in-depth dis-cussion on the long term implications of smart mobility, please see ourreport Longer Term Investments: Smart Mobility, published 19 Octo-ber 2017.

Impact of US tax reformWe noted above the potential boost to US demand as consumersbenefit from individual tax rate reduction. At a company level, thebenefits are more mixed. The reduction in corporate tax rate benefitsearnings, but many companies have net loss carry forwards (NOLs)and so the cash tax impact is less. The multinationals benefit fromthe ability to repatriate trapped foreign cash at a less onerous tax ratethan under current law. But more highly-levered companies lose theirability to fully deduct their interest expense. Of course, the loss ofstate and local individual tax deductions could pinch luxury demandin high tax states such as California and New York.

Media

Did you know that the average millennial now subscribes to at leastthree streaming services while the average person over 60 has at leastone? We recently had an opportunity to meet with all of the majorstudios in Hollywood and walked away with an even greater appreci-ation for how quickly things are changing in the media world. In fact,the pace of change is extraordinary as millennials, in particular, con-tinue to move away from ad-supported, linear television viewing evenas people are now watching more hours of content than ever before.

In 2017, Netflix alone added over 5 million new subscribers in the USwhile pay television (cable) lost roughly 3.5 million viewers (versus justover 2 million in 2016). We've always believed that content is king butafter sitting down with the heads of Disney, Lionsgate, Paramount,Sony and United Talent Agency it became even more apparent howthe power structure within the industry has shifted towards creatorsand away from the studios. People with track records in developingcontent are, and will be, highly sought after.

The move of talent towards Netflix only accents the current medialandscape. According to the executives we met, the company seems



to have an unending thirst for content and, with its current stockprice, an unending amount of money. However, many people wespoke to questioned the long-term experience that an artist has withNetflix as the company has not done a very good job promoting itsshows. Most shows on Netflix seem to be popular for a week or twoand then seem to evaporate. Anyone remember Ozark? Yes, thereare exceptions such as Stranger Things but shows seem to be gettinglost in the company's huge library of content. It will be interesting towatch how the company transforms itself through marketing from adistribution platform to a real Hollywood brand.

While Netflix continues to pour money into all types of content, thefeeling within Hollywood is that Amazon's focus seems to be on tele-vision. Also, video is only one part of Amazon's strategy to acquirenew Prime users so anything the company is likely to do will be withthe growth of Prime in mind. We would not be surprised to see thecompany acquire a library of content as the more it can offer to itsPrime customers, the better.

The rise of platforms such as Netflix and Amazon Video has changedthe playing field for traditional media and the competitive threat thatthey pose is a primary catalyst behind Disney's recent agreement topurchase 21st Century Fox's film and television studios. With thelaunch of a Disney branded direct-to-consumer offering next year, thecompany intends to build a curated, brand driven experience basedon quality entertainment from the likes of Disney-owned Lucasfilm,Marvel and Pixar. The addition of Fox assets such as Avatar, FantasticFour, National Geographic and X-Men, to name just a few, will onlyhelp to provide Disney with an even larger back catalog of contentthat it could offer exclusively on its new service.

We are only in the early innings with regards to the current trans-formation of the media business and it will be fascinating to watchhow the streaming market plays out over time. That said, we believethe winners will be those companies that are able to provide qualitybranded content on a user friendly platform. The race has just begun.

Key Themes

e-Commerce/Omni-channel: We believe opportunities around thee-Commerce theme extend beyond just owning pure-play onlineshopping or e-Commerce companies. US-based companies in con-sumer focused industries such as retail, apparel, consumer packagedgoods and restaurants will benefit as they take an omni-channelapproach to the business and more consumers shift their spendingonline.

Improving consumer environment: Lower unemployment, risingwages and cheap gas should help to provide a tailwind for consumerspending as we head into the fall/holiday season.

Connected car and disruptive mobility: Content per vehicle risingas consumers increasingly demand connectivity and "infotainment"packages. More vehicles now include advanced drive assistance sys-tems ("ADAS") such as autonomous emergency braking, lane assis-

Required DisclosureAdditional Company Disclosure forAmazon, Lowe's, Nike and Starbucks: UBSAG, its affiliates or subsidiaries held othersignificant financial interests in thiscompany/entity as of last month's end (orthe prior month's end if this report is datedless than 10 working days after the mostrecent month's end).



tance, etc., paving the way for eventual launch of driverless car. OEMshave also invested in shared riding services.



Amazon.com Inc.: Most PreferredRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

Amazon.com provides online retail shopping services. It offers new, refurbished, and used products in categories such asbooks; movies; music and games; digital downloads; electronics and computers; home and garden; toys; kids and baby;grocery; apparel; shoes and jewelry; health and beauty; sports and outdoors; and tools, auto, and industrial. The companywas founded in 1994 and is headquartered in Seattle, WA.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 716,697 131,310.0 690,845

Consensus Forecasts (FY end) Dec 2017 Dec 2018E Dec 2019E

Sales ($M) 177,866 233,476 284,109

EPS (adj.) 4.56 8.32 15.39

P/E (x) 312.9 171.6 92.7

Consensus Rating Distribution Buy Hold Sell

39 2 0

Source: Factset, UBS, as of 6 June 2018

What drives our opinionWe added AMZN to our Most Preferred list following the pullbackin shares after President Trump's Twitter attacks. We don't believethere is much truth behind his tweets and used the opportunity to getmore constructive on the name. We are strong believers in the futuregrowth of e-commerce, both domestically and abroad, and believethat AMZN will increase its market share of online and total retailsales. AMZN now has almost 90 million Prime members who spendalmost double than nonmembers, and its AWS business is highly prof-itable and growing. The risks to our view include government regula-tion, slowdown in consumer spending, increased online competition,and execution missteps.In our opinion, most of President Trump's concerns are not accurate orare grossly exaggerated. We are strong believers in the future growthof e-commerce and cloud computing and believe that AMZN will con-tinue to increase its share of online sales. At almost 90 million today,Amazon Prime members in the United States now outnumber land-line and gun owners.

At its core, AMZN is the e-commerce bellwether; however, it hasevolved into so much more. Its growing media business continuesto invest aggressively in securing new digital content, while the prof-itable Amazon Web Services (AWS) could be a USD 100 billion busi-ness over time. The company's Alexa-powered Echo devices are nowhighly popular and Amazon is building an ecosystem around Alexathat is giving it a leg up in the embryonic smart-home/personal-assis-tant market.

Valuation is always a sticking point when it comes to Amazon. Tra-ditional metrics such as P/E are not useful given the company'sdepressed earnings as they invest heavily in the business. As such, welooked at several discounted cash flow and sum-of-the-parts modelson the Street, which take a much longer-term view when valuing thestock.



D.R. Horton Inc.: Most PreferredJonathan Woloshin, CFA, Head Americas Equities

D.R. Horton, Inc. is a homebuilding company in the United States. It constructs and sells single-family homes through itsoperating divisions in 26 states and 79 metropolitan markets in the country, under the name of D.R. Horton, America'sBuilder. The company's homes range in size from 1,000 to 5,000 square feet. The company was founded in 1978 byDonald R. Horton and is headquartered in Fort Worth, TX.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.03 19,168 12,184.6 16,368

Consensus Forecasts (FY end) Sep 2017 Sep 2018E Sep 2019E

Sales ($M) 14,091 16,233 18,165

Net Income ($M) 1,038.4 1,390.3 1,690.9

First Call EPS ($) 2.73 3.60 4.33

P/E (x) 15.8 12.0 9.9


12 10 0

Source: UBS, Factset as of 14 June 2018

What drives our opinionWe believe DHI is one of the best positioned homebuilders based onits geographic footprint, strong financial position, the size and scale tomanage rising material and labor costs and very strong SG&A control.In addition, DHI's focus on the more moderate price point (48% ofhome sales < USD 250K) positions the company to capture the grow-ing base of entry level buyers as the oldest portion of the millenni-als begin to migrate to buying from renting. In addition, DHI recentlyintroduced an active adult line in 22 markets, thus expanding theirproduct offering. Risks include rising interest rates, decreasing afford-ability and decreased access to mortgage financing.

Approximately 38% of DHI's communities are located in Texas andFlorida. The recent tax law changes are more favorable to home own-ership in low tax states. As TX and FL have no state income tax webelieve this provides DHI with a competitive advantage. In addition,the reduction in corporate tax rates will allow DHI to realize strongerearnings growth. Further, DHI's acquisition of 75% of Forestar (NotRated), a land development company, will significantly increase DHI'scapital efficiency by optioning a greater percentage of its developedlots. The increased capital efficiency has led DHI to reduce debt,increase its dividend (+25% YoY in fiscal 1Q 2018) and repurchaseshares. DHI has an additional USD 175 million remaining on it cur-rent share repurchase program. In our view DHI's myriad investmentattributes combined with an attractive valuation provide a favorablerisk/rewards profile for the shares.



Home Depot Inc.: Most PreferredRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

The Home Depot operates as a home improvement retailer in the United States, Canada, and Mexico. The companyprovides its products and services through Home Depot and EXPO Design Center stores. Its Home Depot stores sell a rangeof building materials, home improvement products, and lawn and garden products. They also provide various installationservices. The company was founded by Bernie Marcus and Arthur Blank in 1978 and is headquartered in Atlanta, GA.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.01 233,486 44,529.0 207,171

Consensus Forecasts (FY end) Jan 2018 Jan 2019E Jan 2020E

Sales ($M) 100,904 107,887 112,100

EPS (adj.) 7.45 9.45 10.19

P/E (x) 27.0 20.4 18.9


21 9 0


What drives our opinionWe view Home Depot as Most Preferred due to its exposure to the UShousing market, continued opportunity for gains in productivity andsupply chain enhancements, and further share gains with the pro con-sumer. However, we are watching mortgage rates as their recent risehas impacted stock performance even though the company arguedthat affordability remains very high. The risks to HD's inclusion on ourMost Preferred list include competition, the macro environment, andperformance of the US housing sector.

Home Depot has grown earnings on average by roughly 25% overthe last 10 quarters. During this time period, the company has beena market-share gainer over Lowe's. We attribute this not only tomanagement's top-line execution but also to their quick reaction tohalt square-footage growth during the housing slowdown and ratherinvest in the business to enhance customer experience. This includ-ed initiatives to improve merchandise management and inventoryturnover through an overhauling of its supply chain, better service forthe pro customer (roughly 35% of sales), and an expanded onlinepresence and offering. In addition, trends in the home improvementcategory continue to be positive, supported by macro tailwinds anda better consumer environment. Even with the recent rise in mort-gage rates, management remains positive on the housing cycle and isquick to remind investors that the historical 30-year rate is 5.6% andthat they could go to 7% before there is any risk to affordability (wehave our doubts). Also, the sector is somewhat insulated from onlinecompetition. Management continues to aggressively buy back stock,and Home Depot has one of the highest dividend payout ratios in thehardlines sector and targeted to rise over time.



Hyatt Hotels Corp: Most PreferredJonathan Woloshin, CFA, Head Americas Equities

Hyatt Hotels Corp. owns, operates, manages, and franchises hotels and resorts. The company offers deluxe hotels withmeeting facilities and special services. The firm's subsidiaries operate hotels and resorts, including Hyatt, Hyatt Regency,Hyatt Resorts, Grand Hyatt, Park Hyatt, Hyatt Place, Hyatt Summerfield Suites, and Andaz. Hyatt Hotels was founded in1957 and is headquartered in Chicago, IL.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.19 10,527 7,672.0 9,227


Sales ($M) 4,482 4,682 4,884

Net Income ($M) 249.0 190.6 221.1

First Call EPS ($) 1.75 1.57 1.88

EBITDA ($M) 1,019.0 789.5 831.5

EV/EBITDA (x) 9.6 12.4 11.8


7 12 0

Source: FactSet, UBS, as of 14 June 2018

What drives our opinionHyatt shares have outperformed its C Corp peers YTD as the compa-ny has raised its RevPAR guidance for 2018, announced its desire tosell USD 1.5bn in assets over the next three years and increase capitalreturns to shareholders. The significant valuation gap with its peershave contributed to the outperformance as well. Despite this outper-formance H continues to trade at a sizable valuation discount to itsC Corp. peers. Risks include slower-than-expected RevPAR growth,rapidly rising interest rates, excess new capacity, declining corporateEPS, and a sub-optimal ownership structure.

H's management continues to deliver on its commitment to furthermonetize owned assets and joint ventures, thus becoming more asset-light. To this point, H recently announced the sale of several largeassets (while maintaining long-term management contracts). Man-agement has indicated they have received significant investor interestin individual assets and has stated there are no sacred cows in theportfolio. In addition, H has a very strong balance sheet with access tosignificant liquidity and the lowest debt-to-capital and debt-to-EBIT-DA ratios among its C Corp peers.

Although H's dual-class share structure is sub-optimal, we recognizethat H continues to trade at a discount to its C Corp peers on for-ward EV/EBITDA multiples based on consensus estimates. In a risingRevPAR environment driven by stronger economic growth and corpo-rate earnings, H's large owned portfolio would likely drive significantoperating leverage. In our view, investors would be willing to lookbeyond the corporate governance issues and focus on the earningsgrowth potential.



Lowe's Cos.: Most PreferredRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

Lowe's Cos. retails home improvement products. It offers products and services for home decorating, maintenance, repair,remodeling, and property maintenance. The company was founded in 1946 and is headquartered in Mooresville, NC.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.85 88,083 35,291.0 70,920


Sales ($M) 68,619 71,870 74,610

EPS (adj.) 4.39 5.45 6.10

P/E (x) 21.3 18.2 16.1


19 8 0


What drives our opinionWe recently added LOW to our Most Preferred list following theannouncement of the CEO's retirement and a search for his succes-sor. The company has significantly underperformed Home Depot overthe last several years and new leadership could help reinvigorate thebusiness. We also note that an activist investor is currently involvedin the name and the company recently announced the appointmentof a new CEO and is searching for a CFO. The risk to our view is anunexpected worsening outlook for the housing sector and slowdownin consumer spending.

Housing momentum appears to be on track as existing home salesare strong even as supply, especially at the lower end of the market,remains an issue. The environment for consumer spending is good,supported by job growth, and the recent tax cuts should put moremoney into people's pockets. Also, home improvement is somewhatinsulated from online competition given the need for service, andrecent tariff actions by China are unlikely to impact LOW. LOW hasstruggled with weaker sales growth than Home Depot and has beentrying to improve profitability by streamlining its supply chain andinventory management. New CEO Marvin Ellison should bring oper-ational expertise to Lowe's given his years at Home Depot, and thecompany is currently searching for a new CFO. While 1Q sales werenegatively impacted by the weather, sales have picked up dramatical-ly over the past several weeks. From a valuation standpoint, LOW's2019E consensus P/E of 16x is among the lowest relative to earningsgrowth compared to almost all other large-cap retailers.



McDonald's Corp.: Most PreferredRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

McDonald's operates and franchises a food restaurant chain. Its food products include World Famous French Fries,Big Mac, Quarter Pounder, Chicken McNuggets, and Egg McMuffin. McDonald's is a food service retailer with localrestaurants serving nearly 50 million people in more than 118 countries each day. The company was founded in 1948and is headquartered in Oak Brook, IL.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.46 156,117 33,803.7 126,147


Sales ($M) 22,820 21,217 21,127

First Call EPS ($) 6.66 7.67 8.28

P/E (x) 25.1 21.8 20.2


19 10 0


What drives our opinionWe view McDonald's as Most Preferred given the turnaround of theUS business and the company's defensive nature and stable dividend.Domestic market-share gains were the key driver behind stock priceappreciation over the past year. The risks to MCD's inclusion on ourMost Preferred list include increased competition and the potentialthat trends in the US do not continue to improve.

McDonald's continues to look for ways to innovate its menu throughlimited-time offers and upgrades on core menu items. The recentlaunch of USD 1, USD 2, and USD 3 value meals seems to havegone well, and the company is quick to point out that this is not ashort-term promotion but rather a long-term sustainable platform.Management has laid out several initiatives to return the US busi-ness to sustainable traffic growth, including store reimages, a sim-plified food offering, and mobile order and pay. Also, the companyis quickly getting on board with the use of technology in its stores,such as self-ordering kiosks, in order to improve the customer expe-rience and attract the Millennial consumer. Other strategic initiativesinclude domestic/international delivery programs, national value cam-paign, and asset upgrades/"Experience of the Future" progress. Final-ly, McDonald's continues to have a very attractive dividend yield, andwhen combined with share repurchases, the company plans to returnUSD 30 billion to shareholders by the end of next year.



Meritage Homes Corp.: Most PreferredJonathan Woloshin, CFA, Head Americas Equities

Meritage Homes Corp. engages in the designing and building of single-family attached and detached homes. It offershomes for a range of homebuyers, including first-time, move-up, luxury, and active. It has operations in three regions:West, Central, and East, which are located in nine states. The company was founded by Steven J. Hilton in 1985 and isheadquartered in Scottsdale, AZ.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 3,013 3,255.5 1,815


Sales ($M) 3,241 3,565 3,918

Net Income ($M) 143.3 207.7 237.8

First Call EPS ($) 3.80 5.01 5.70

P/E (x) 12.1 9.2 8.1


5 7 0

Source: FactSet, UBS as of 14 June 2018

What drives our opinionWe see Meritage Homes (MTH) as a well-run mid-cap home builderexposed to states seeing significant population inflows and jobgrowth in the U.S. After many years of focusing on the move up buy-er MTH has made a substantial push into the entry level (EL) market.the EL segment is the fastest growing portion of the housing sectorand should allow MTH to significantly increase volumes and betterleverage its fixed costs. MTH has a solid balance sheet with manage-able debt maturities and has sufficient land holdings to capitalize onprojected growth. Risks include rising interest rates, declining afford-ability, overbuilding of spec homes and rising input costs.

MTH's strategic shift to the EL market, particularly in the Eastern andCentral regions, has led to increased gross and operating margins ashome costs are generally lower in these regions, fixed cost leveragehas improved with increased deliveries and MTH's larger footprinthas provided more scale in terms of labor and material costs. In addi-tion, MTH has increased its spec construction activity which has fur-ther enhanced margins. MTH's EL active community count has grown50% YOY in 2017 and 70% of lots contracted in 2017 were orient-ed towards the EL segment. MTH's focus in Colorado, Texas, Flori-da, Arizona, North & South Carolina, Tennessee, Georgia and Califor-nia positions the company in some of the best population, job andincome growth markets in the country. In addition, MTHs cancella-tion rate has consistently been below its homebuilding peers. Despitethese attributes MTH trades roughly in line both its SMID and largecap peers based on book value and consensus EPS estimates for 2018and 2019.



Nike Inc.: Most PreferredRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

Nike designs and manufactures athletic footwear, apparel, and equipment. The company designs and sells shoes for avariety of sports, including baseball, cheerleading, golf, volleyball, and wrestling. NIKE also sells Cole Haan dress and casualshoes. The company operates NIKETOWN shoe and sportswear stores, NIKE factory outlets, and NIKE Women shops. Nikesells its products throughout the US and in about 200 other countries. Nike was founded by Bill Bowerman and Philip H.Knight in 1964 and is headquartered in Beaverton, OR.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.12 107,606 23,259.0 108,079

Consensus Forecasts (FY end) May 2017 May 2018E May 2019E

Sales ($M) 34,350 36,017 38,760

EPS (adj.) 2.51 2.35 2.67

P/E (x) 21.1 30.5 28.0


16 14 0

Source: Factset, UBS as of 6 June 2018

What drives our opinionWe view Nike as Most Preferred due to its strength in innovative prod-uct and premium brand positioning. While the company's US busi-ness has struggled, management appears to be making progress onits plan to elevate the customer experience and focus on its digitalbusiness. International continues to be a source of strength for Nike,and recent commentary out of DKS suggests that new product inno-vation is exciting. The risks to NKE's inclusion on our Most Preferredlist include a slowdown in consumer spending on athletic footwear,changes in the global macro environment, and increased competition.

In our view, the company's recent performance underscores itsstrength in innovative product and premium brand positioning. Whilesales growth, particularly in the US, has been disappointing, we thinkseveral drivers are in place for a turnaround. These include strengthoverseas, a strong product pipeline in running, and better basket-ball sales aided by the popularity of the NBA. With regards to mar-gins, company-specific drivers include a mix-shift toward direct-to-consumer and further gains in supply chain innovation. Also, weexpect the level of promotions to ease, and foreign exchange is now atailwind. Finally, the company's balance sheet continues to be a clearpoint of strength with almost USD 4 billion of cash on hand at the endof the year and an additional USD 2 billion in short-term investments.



Pulte Homes Inc.: Most PreferredJonathan Woloshin, CFA, Head Americas Equities

Pulte Homes develops and sells residential real estate. It engages in land development and homebuilding in 25 states, alsoconstructing roads, sewers, water and drainage facilities, and other amenities for its communities. Approximately 75% ofthe units it sells are single-family detached homes. Under its Del Webb Brand, Pulte is the nation's largest builder of activeadult communities. Pulte Mortgage LLC originates mortgage loans for more than 70% of the homes sold by Pulte. PulteHomes was founded in 1950 and is headquartered in Bloomfield Hills, MI.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.21 12,303 9,686.6 8,548


Sales ($M) 8,465 9,599 10,605

Net Income ($M) 442.6 884.9 984.2

First Call EPS ($) 2.02 3.09 3.53

P/E (x) 15.2 10.0 8.7


7 13 1


What drives our opinionPHM has had a very strong spring selling season and continues todeliver on its value creation strategy of driving strong risk-adjustedreturns and returning capital to shareholders. Since 2013, PHM hasrepurchased more than 20% of its float and, repurchased USD 1 bil-lion in 2017 and authorized an additional USD 500 million for 2018.The decision to sell excess land could add further firepower to theshare repurchase program. Risks include rising interest rates, furtherpressure on land and labor costs and gross margins, decreasing homeaffordability, and a lack of pricing power.

PHM is well diversified geographically and has generated strong ordergrowth. The company is judiciously reducing its land spend but stillhas more than eight years of supply between owned and optionedlots. In addition, PHM has begun increasing its focus on the first-timebuyer (a segment that has begun to return to the housing market)while simultaneously reducing the capital intensity of its active adultbusiness. The increased focus on the first-time buyer could be welltimed given the potential further reduced regulation and increasedmortgage access with the Trump administration. Finally, despite hav-ing among the highest projected consensus EPS growth rates for 2018and 2019, PHM trades at a P/E discount to its large-cap peers.



Walt Disney Co.: Most PreferredRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

The Walt Disney Company produces entertainment experiences based on creative content and storytelling. DIS has fourbusiness segments: 1) media networks; 2) parks and resorts; 3) studio entertainment; and 4) consumer products andinteractive media. The company also engages in retail and online distribution of products through The Disney Store andDisney Shopping.com. Walt Disney was founded in 1923 and is headquartered in Burbank, CA.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.62 178,815 95,789.0 150,728


Sales ($M) 55,137 59,098 61,303

EPS (adj.) 5.70 7.09 7.77

P/E (x) 17.3 14.1 12.9


15 7 2


What drives our opinionWe view Walt Disney as Most Preferred as it possesses what we believeto be the best product pipeline in the media space with numerousupcoming catalysts, including its long-term pipeline of high-profiletheatrical releases from Lucasfilm, Pixar, and Marvel, not to mentionFrozen 2. Aside from the studio business, the company opened its firsttheme park in Shanghai, China, which should give a substantial boostto the Disney brand in this important market. The risks to Disney'sinclusion on our Most Preferred list include the pace of cable cord-cutting and potential subscriber losses at ESPN.

We believe that Disney possesses the best product pipeline in themedia space with a robust film lineup upcoming, including four Mar-vel films, two Star Wars films, and three animated movies. Aside fromthe studio business, Disney opened its first theme park in Shanghai,China, which should give a substantial boost to the Disney brand inthis important market. In addition, major new park attractions arescheduled to open in the US over the next several years, includingToy Story Land in Florida and Shanghai, and Star Wars Land in Floridaand California. And while there are some concerns about the paceof cable cord-cutting and potential subscriber losses at ESPN, espe-cially among the younger demographic, we believe this is still oneof the most valuable media brands that should be able to managethrough whatever happens with the cable TV bundle. New over-the-top streaming services could potentially be accretive to the pay-TVecosystem by targeting those households that currently do not payfor cable television. Finally, Disney is a big beneficiary of corporate taxreform as it has one of the highest effective corporate tax rates witha very high domestic earnings exposure.



Comcast Corp. (Cl A): BellwetherRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

Comcast owns and operates cable TV systems. It offers consumer entertainment, information, and communicationproducts and services to residential and commercial customers. The company operates in the cable and programmingsegments. The cable segment manages and operates cable systems, including video, internet, phone services, and regionalnetworks, while programming operates consolidated national programming networks. Comcast was founded in 1963and is headquartered in Philadelphia, PA.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.75 235,720 186,949.0 167,295


Sales ($M) 84,526 89,663 91,937

EPS (adj.) 2.06 2.50 2.75

P/E (x) 19.4 12.6 11.4


18 3 0


What drives our opinionWe believe that Comcast will perform in line with the sector givenpositive fundamentals in cable and NBCU, offset by the risks of pay TVsubscriber declines, increased regulation of broadband pricing, and aninability to pass through programming cost increases to consumers.The company's recent bid for Sky has also created some near-termuncertainty. The risk to our view is an unexpected sustained improve-ment in outlook or conversely an unexpected worsening outlook.We believe that Comcast will perform in line with the sector. Thecompany reported decent first-quarter results with good performanceacross most of its businesses. Cable continues to deliver steady growththrough pricing and product differentiation, while revenue at NBCUwas solid, with strength coming from cable networks and theme parksoffsetting weaker-than-expected broadcast and filmed entertainmentresults. While cable cord-cutting is potentially an issue, it should beable to offset some of these losses with increased prices for broad-band and through the monetization of NBCU content via over-the-top offerings and online video providers. The company's recent bidfor the UK's Sky satellite business has created some near-term uncer-tainty as investors wait to see if a bidding war takes place betweenthe company and Fox/DIS. Recall that Fox currently owns 39% of Skyand Disney has agreed to purchase these assets.



Dick's Sporting Goods Inc.: BellwetherRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

Dick's Sporting Goods, Inc. is an authentic full-line sporting goods retailer offering a broad assortment of brand-namesporting goods equipment, apparel, and footwear in a specialty store environment. The company also owns and operatesGolf Galaxy, a golf specialty retailer.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.97 3,683 4,203.9 3,713


Sales ($M) 8,590 8,682 8,857

EPS (adj.) 3.01 3.06 3.20

P/E (x) 10.5 12.2 11.7


8 20 3


What drives our opinionSales trends continue to be disappointing as colder weather duringthe first quarter was unable to offset softness in other parts of thebusiness. While innovation from some of the company's key vendors(i.e. Nike, Callaway, and Taylor Made) will help drive some businessthis year, the stock is likely to remain range-bound until managementproves that is can consistently grow sales and earnings. While thestock is cheap, in our view, it's unlikely to get a bigger multiple any-time soon.

While sales trends in the first quarter remained sluggish, margins weremuch better than expected, which led to a significant earnings beat.Given recent bankruptcies in the sporting goods space, we expectedsales trends to accelerate, but this does not seem to be happening.The silver lining here is that earnings are not being impacted as man-agement is implementing some restructuring efforts and EPS guid-ance is less dependent on sales. Nevertheless, we liked the near-termsetup on the name as sales should be improving, but they are not, andcontinued concerns over the longer-term online threat will remain anoverhang. While valuation does not appear demanding, investors willlikely focus on the company's ability, or lack thereof, to sustain posi-tive same-store sales.



Ford Motor Co: BellwetherSally Dessloch, Head Equity Sector Strategy Americas

Ford Motor manufactures cars and trucks. It operates via two segments: Automotive and Financial Services. The Automotivesegment includes the manufacturing and sale of Ford and Lincoln brand vehicles and related service parts in North America,Europe, Asia, and South America. The Financial Services segment includes vehicle-related financing, leasing, and insurance.The company was founded in 1903 and is headquartered in Dearborn, Michigan.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

4.95 166,801 257,808.0 48,260


Sales ($M) 156,776 159,517 158,240

EBIT margin (%) 2.6 4.8 5.1

Net Income ($M) 7,602.0 6,161.4 6,242.0

First Call EPS ($) 1.78 1.55 1.54

P/E (x) 6.7 7.7 7.7


5 15 1


What drives our opinionFord shares have underperformed the consumer discretionary bench-mark reflecting negative investor sentiment toward the company andthe auto industry. Ford's new leadership has promised an ambitiousturnaround but has not presented its full plans. Guidance for 2018calls for declining earnings on the back of flattish EPS growth in 2017.We remain on the sidelines as we see risk/reward as balanced giventhe lack of visibility on when results might improve. Risks to our callinclude greater success with new products, higher industry sales orexit of loss-making operations; a slowdown in the US economy, high-er input costs, more investments in new technology and trade policyare downside risks.

Ford's new CEO Jim Hackett has now been on the job for year. Inthat time, he has unveiled a new cost-cutting program, originallypegged at USD 14 billion in savings by 2022, but recently upped byUSD 11.5 billion. He also announced the exit of virtually all of Ford'sNorth American passenger car line-up, with plans to divert productioncapacity to SUVs, light trucks and new electric vehicle offerings. Butthe company has not quantified the costs of these actions, nor has itindicated how much of the savings will be reinvested in electrification,connectivity and autonomous driving. And it still needs to address theprofitability of its European and South American operations. Whilewe applaud management's actions to date, the lack of more specificson these issues, combined with execution risk, lead us to be cautiousabout the company's outlook. We think the stock is unlikely to out-perform until investors have more confidence in management's turn-around plan.

Ford is viewed by the investment community as lagging its peers inautonomous driving and electrification. We think this is a fair assess-ment, but note that in the aftermath of GM's monetization of a por-tion of its auto tech subsidiary, it is possible that Ford could take asimilar approach, which would be a risk to our call.



Gap Inc.: BellwetherRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

Gap is an international specialty retailer offering clothing, accessories, and personal care products for men, women,children, and babies under the Gap, GapKids, babyGap, GapBody, Banana Republic, and Old Navy brand names. Gapoperates over 3,100 retail and outlet stores throughout the United States, as well as in Canada, the United Kingdom,France, Ireland, Italy, China, and Japan. The company was founded in 1969 and is headquartered in San Francisco, CA.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.89 12,071 7,989.0 12,382


Sales ($M) 15,855 16,277 16,605

EPS (adj.) 2.13 2.63 2.77

P/E (x) 14.9 12.1 11.5


2 22 2


What drives our opinionWe believe Old Navy can remain GPS's growth engine given its expo-sure to the low-end consumer. Also, the positive tailwinds of low-er taxes for consumers and tax rates for retailers will likely continueto outweigh the secular headwinds that continue to challenge all ofretail. We think the stock is fairly valued at current levels as the pro-motional environment remains intense and the Gap brand seems tobe in a never-ending turnaround situation. Upside risks include bet-ter-than-expected sales results at the Gap brand.The company has now experienced several quarters of positive same-store sales results driven by solid momentum at Old Navy even astrends at the Gap are weak. Old Navy's 9% same-store-sales growthin the fourth quarter was one of the best results in all of retail asthe brand's value offering is resonating well with its core consumer.However, the Gap brand has unsuccessfully tried to reinvigorate itselfover the past two years and is now in search of a new leader. Whilemost other apparel retailers saw better performance during the holi-day quarter, Gap's result were somewhat disappointing. In fact, inven-tory levels at the brand were heavy coming out of 4Q and additionalpromotions are likely in the first half of the year. Until we begin to seeimprovement at the Gap brand, we believe further stock upside willbe limited as strength at Old Navy will likely be offset by persistentweakness at the Gap.



General Motors: BellwetherSally Dessloch, Head Equity Sector Strategy Americas

General Motors Company (GM) designs, manufactures, and markets cars, crossovers, trucks, and automobile partsworldwide. The company, through its subsidiary General Motors Financial Company Inc., provides automotive financingservices and lease products through GM dealerships.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

3.44 139,076 212,482.0 62,269


Sales ($M) 145,588 145,905 147,826

EBIT margin (%) 8.8 8.2 8.4

Net Income ($M) 348.0 9,042.8 8,950.4

First Call EPS ($) 6.62 6.43 6.50

P/E (x) 6.6 6.8 6.7


13 7 0


What drives our opinionGeneral Motors' sales and profits should be aided by its exposure topickup trucks and SUVs, which are gaining share and have highermargins than cars. Profits are expected to hold steady in 2018 despiteraw material headwinds and product launch costs but should buildagain in 2019. Margins may continue to benefit from restructuring asGM has been aggressive in fixing underperforming businesses, suchas South Korea. However, automaker stocks do not typically outper-form the consumer discretionary benchmark at this point in the eco-nomic cycle so we remain on the sidelines. Risks to the upside includebetter industry growth than we have assumed; downside risks includeslowing economic growth.

GM's perceived lead versus peers in developing its "smart mobili-ty" portfolio was substantiated with the news that prominent techinvestor Softbank has agreed to invest USD 2.3 billion in GM's Cruisesubsidiary, which houses its smart mobility activities. Softbank willinvest in two phases and upon completion, will own nearly 20% ofthe segment. GM will now break out the sales and profits of Cruise,leading to increased transparency around its efforts. And the Softbankstake implies a USD 11.5 billion valuation for Cruise, likely well aboveStreet estimates. As a result, GM's stock appreciated by almost 5%on the news. From here, we think the risk/reward appears balancedfor GM's shares. We therefore do not expect the stock to outperformthe consumer discretionary benchmark over a 12-month investmenthorizon.

The passage of tariffs on steel and aluminum imports may cause amodest increase in the cost to manufacture vehicles which may nottake effect immediately owing to contractual provisions. But it maybe difficult for the industry to pass along the costs to consumers, inour opinion. Stiffer sanctions, such as the elimination of NAFTA, couldhave a more dramatic impact, especially on GM given that it importstrucks from Mexico.



Hilton Worldwide: BellwetherJonathan Woloshin, CFA, Head Americas Equities

Hilton Worldwide Holdings Inc., a hospitality company, is engaged in the ownership, leasing, management, development,and franchising of hotels and resorts worldwide. The company operates hotels under the brand names of Hilton Hotels &Resorts, Waldorf Astoria Hotels & Resorts, Conrad Hotels & Resorts, DoubleTree by Hilton, Embassy Suites Hotels, HiltonGarden Inn, Hampton Inn, Homewood Suites by Hilton, and Home2 Suites by Hilton. It was founded in 1919 and isheadquartered in McLean, Virginia.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.74 32,520 14,308.0 26,096


Sales ($M) 9,140 9,704 10,317

First Call EPS ($) 1.91 2.63 3.13

EV/EBITDA (x) 18.9 15.2 14.1

EBITDA ($M) 1,675.0 2,086.9 2,247.7


14 8 1


What drives our opinionThe significant recovery in HLT's share price from the 2016 lows haslargely been a result of three factors: 1) the completion of the splitof the company into three separate entities (effective January 2017);2) industry RevPAR has been stronger than many market participantsfeared; and 3) the election of Donald Trump as president has raised theprospects for increased economic growth. Risks include faster (slower)economic and RevPAR growth, a recession, a stronger (weaker) USD,and faster (slower) new capacity growth.

Although we continue to believe HLT has a superior managementteam and operational platform, we have to balance that against howmuch potential incremental economic growth is reflected in HLT's val-uation. Based on current consensus 2018 EBITDA estimates, HLT istrading at more than 15x EV/EBITDA. This multiple is at the higherend of the group's historical trading range and, given how much laterwe are in the lodging cycle, limits the potential for multiple expan-sion, in our opinion. Combining this with the prospect for increasednew capacity we see the risk/reward as more fairly balanced. On thepositive side one potential complication has been resolved. The 25%stake Anbang Insurance (AI) owns in HLT was successfully sold in April2018. The shares were readily absorbed by the market, thus removingan overhang on the shares.



Lennar Corp. (Cl A): BellwetherJonathan Woloshin, CFA, Head Americas Equities

Lennar builds residential, commercial, and institutional buildings. It also provides residential mortgage, title, and closingservices. Lennar builds move-up and retirement homes in communities that cater to almost any lifestyle, such as urban,golf course, active adult, or suburban communities. It was founded in 1954 and is headquartered in Miami, FL.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.27 19,399 18,745.0 19,201

Consensus Forecasts (FY end) Nov 2017 Nov 2018E Nov 2019E

Sales ($M) 12,651 14,193 23,385

Net Income ($M) 802.7 1,261.3 2,211.1

First Call EPS ($) 3.77 5.33 6.84

P/E (x) 14.1 10.0 7.8


18 4 0


What drives our opinionDespite a strong management team and balance sheet, a geographi-cally well-diversified portfolio, and a favorable land position, the cata-lysts we believed were going to be drivers of incremental value appearto be significantly further in the future than originally anticipated.These catalysts include the potential monetization of Rialto and themulti-family business. In addition, the public offering of the Five Pointsventure has had lackluster performance. Risks include rising (falling)interest rates, rising (falling) pressure on land and labor costs, decreas-ing (increasing) home affordability, and an increase (decrease) in pric-ing power.

In addition to the lack of catalysts outlined above, LEN has adoptedwhat it refers to as a "soft pivot" strategy. In essence, this "soft pivot"is leading to reduced land purchases and more judicious capital allo-cation. Although we are always appreciative of companies being goodstewards of shareholder capital, the impact of the "soft pivot" hasled to slower volume sales and revenue growth. This, combined withthe potential pressure on gross margins from rising land and laborcosts, is weighing on forward EPS growth. Further adding to LEN'srisk profile was their recent acquisition Cal Atlantic Homes. Althoughwe believe there is significant strategic merit in the acquisition, theintegration of CAA, which was the combination of two large homebuilders, enhances LEN's risk profile, particularly given CAA's focuson upper end homes in the higher cost West Coast markets whereaffordability is very strained.



Lions Gate Ent Class A: BellwetherRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

Lionsgate engages in motion picture production and distribution, television programming and syndication, homeentertainment, family entertainment, digital distribution, new channel platforms, and international distribution and sales.The company was founded in 1997 and is headquartered in Santa Monica, CA.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 8,532 9,196.9 5,703

Consensus Forecasts (FY end) Mar 2018 Mar 2019E Mar 2020E

Sales ($M) 4,129 3,971 4,285

EPS (adj.) 2.15 0.47 0.84

P/E (x) 12.0 50.9 28.4


10 8 0


What drives our opinionWe recently removed Lions Gate from our Most Preferred list andadded it to Bellwether. While we continue to believe that the companyis a likely takeover target in the media space given its robust contentoffering, the market appears to have fallen out of love with medianames in general and doesn't believe in the M&A story. Upside risksinclude better-than-expected results in film and television, faster sub-scriber growth at Starz, and potential consolidation. Downside risksinclude weak film results and subscriber losses at Starz.

In our opinion, Lions Gate remains favorably positioned in the cur-rent media landscape given its lack of exposure to ad-supported tele-vision networks, large library of content, and ownership of the pre-mium Starz network. However, the market appears to be fixated onthe government's scrutiny around the AT&T/Time Warner deal, whichhas clouded the M&A picture in the near term. In addition, we believerecent insider selling has also pressured the stock. While we believethat industry consolidation could benefit LGF and the current sell-offin the stock is greatly overdone, we moved to the sidelines until theenvironment for media investors becomes clearer.

Lululemon Athletica: BellwetherRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

Lululemon is a specialty retailer that designs and sells technical athletic apparel under its lululemon athletica (adult) andivivva athletica (kids) brand names. The company is based in Vancouver, Canada.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 7,344 1,657.5 8,011


Sales ($M) 2,344 2,632 2,945

EPS (adj.) 2.14 2.53 3.02

P/E (x) 37.2 31.5 26.4


15 17 2


What drives our opinionWe continue to believe in the margin story at LULU and would lookto get involved in the stock again on any significant pullback. Upsiderisks include better-than-expected sales results and margin perfor-mance while downside risks include slow consumer spending trendsand competition.

In our view, LULU will perform in line with the sector. Top-line trendsare still positive and the brand has managed to avoid steep mark-downs and promotions that have plagued other retailers. The compa-ny appears to be on track to meet its 2020 target of USD 4 billion insales with a 20%-plus operating margin. However, mall traffic remainsvery choppy and the competitive environment does not appear to beeasing up at all. Our view has not changed that LULU still has room foradditional store growth, and additional margin improvement couldcome from cost savings and better-than-expected same-store-salesgrowth. The company's premium brand positioning should enable itto be a market-share gainer in the growing ath-leisure market. Also,we believe LULU is one of the most attractive unit growth stories inthe consumer space, with international expansion just beginning togain steam.



Macy's Inc.: BellwetherRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

Macy's Inc. operates department stores and an e-commerce business under two separate brands, Macy's andBloomingdale's, with about 840 stores in 45 states. Macy's was founded in 1820 and is headquartered in Cincinnati, OH.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

5.17 13,384 19,381.0 8,909

Consensus Forecasts (FY end) Feb 2018 Feb 2019E Feb 2020E

Sales ($M) 24,837 24,895 24,988

EPS (adj.) 3.77 3.84 3.50

P/E (x) 6.9 10.4 11.4


3 13 2


What drives our opinionTop-line trends were better than expected in 1Q and the companyappears to be getting a boost from healthy consumer fundamentals.However, we don't believe the structural issues facing US departmentstores have abated, and more difficult comparisons in the back-halfof the year are a concern. Continued speculation around potentialmonetization of the company's real estate portfolio does limit thestock's downside. The greatest risk to our view would likely involveeither better- or worse-than-expected same-store sales trends.

In our view, Macy's will perform in line with the sector. While valu-ation is not demanding, we aren't likely to see much in the way ofnear-term multiple expansion given headwinds facing the departmentstore channel, including up-and-down sales trends and changing con-sumer spending habits. However, the company continues to discusspotential opportunities to monetize its real estate assets, and we thinkthis provides a floor for the stock. Accordingly, we see the risk/rewardas balanced at current levels.



Marriott International Inc.: BellwetherJonathan Woloshin, CFA, Head Americas Equities

Marriott International, Inc., is a global leading lodging company with more than 5,500 properties in 100 countries andterritories. Founded by J. Willard and Alice Marriott and guided by Marriott family leadership for nearly 90 years, thecompany is headquartered in Bethesda, Maryland.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.94 60,973 23,948.0 49,902


Net Income ($M) 1,372.0 1,917.6 2,117.3

First Call EPS ($) 4.24 5.36 6.20

EBITDA ($M) 3,414.0 3,416.6 3,736.8

EV/EBITDA (x) 17.1 17.1 15.6


11 13 0


What drives our opinionWe believe MAR has a best-in-class management team and assetbase. In addition, MAR returns significant capital to shareholders.These attributes are counterbalanced by what will likely be a long andcomplex integration associated with the acquisition of Starwood'slodging assets. We believe the pro forma combined company willlikely be a very strong global competitor with unmatched geograph-ic reach, brand diversity, and cash flow generation. That said, theintegration complexities combined with an extended valuation willkeep the shares range-bound. Risks include a rapidly changing lodg-ing cycle, and a more- or less-favorable-than-anticipated transactionoutcome.

The completed acquisition of Starwood has created a company of 30leading brands with 1.1 million rooms in more than 5,500 hotels inover 100 countries. As the combined company has more than USD1bn in G&A expenses, we believe significant savings could be real-ized. In addition, we believe there are multiple opportunities for rev-enue, purchasing, and marketing synergies with the combined com-pany given the dominant global footprint. Further, MAR is targetingasset sales beyond those currently contemplated by Starwood. TheUSD 1.5–2.0bn in potential after-tax asset-sale proceeds should allowMAR to continue its long-standing tradition of repurchasing shares.These positives are balanced by the fact that the integration will becomplex and time-consuming, and invariably incur some challenges.In addition, the prospect for increased new capacity, reduced transientbusiness travel, and slowing group bookings leaves the risk/rewardmore fairly balanced.



Nordstrom: BellwetherRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

Nordstrom, Inc. is one of the leading fashion specialty retailers based in the US. Founded in 1901 as a shoe store in Seattle,today Nordstrom operates 366 stores in 33 states. The company also serves customers through its e-commerce site andcatalogs and operates in the online private-sale marketplace through its subsidiary HauteLook.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.99 9,913 8,115.0 8,263


Sales ($M) 16,127 16,482 16,127

EPS (adj.) 2.95 3.47 3.59

P/E (x) 13.8 13.0 13.8


2 17 2


What drives our opinionAlthough the company is an online leader (e-commerce represents25% of sales), the majority of its sales still come from brick-and-mor-tar, which is challenged with no signs of improvement in sight. Whilethe stock has recovered off the lows from last summer, continuedsluggish comp trends are guided for this year. Risks include a reboundor further slowdown in store traffic, and an acceleration or deceler-ation in consumer spending. Also, the company recently announcedthat it had rejected the Nordstrom family's offer to take it private forUSD 50 per share.

Although we continue to believe JWN has a best-in-class omni-chan-nel strategy (e-commerce represents 25% of sales) and possesseshealthy square-footage growth in both its Nordstrom and Rack divi-sions, we cannot ignore the fact that store traffic remains weak andbrick-and-mortar sales are unlikely to accelerate anytime soon. Thecompany did recently announce that it would slow down investmentspending going forward after making billions of dollars in investmentsover the past few years in online, store growth, supply chain, andtechnology. While we believe JWN is doing a good job keeping inven-tory levels under control and provides a superior customer experiencecompared to its department store peers, we don't believe there ismuch room for multiple expansion, and EPS growth is likely to belackluster given soft sales growth. We note that the company recentlyannounced that it had rejected the Nordstrom family's offer to takeit private for USD 50 per share.



Starbucks Corp.: BellwetherRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

Starbucks purchases and roasts high-quality whole bean coffees and sells them through company-operated retail stores.Starbucks also sells coffee and tea products and licenses its trademark through other channels such as licensed retailstores, and, through certain of its equity investees and licensees, Starbucks produces and sells a variety of ready-to-drinkbeverages. The company was founded in 1985 and is headquartered in Seattle, WA.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.87 85,553 14,365.6 82,674


Sales ($M) 22,387 24,879 26,945

EPS (adj.) 2.06 2.50 2.76

P/E (x) 26.1 22.9 20.7


21 10 0


What drives our opinionAt Starbucks, the fundamental top-line growth story appears to beslowing and unless trends accelerate in the second half, there is likelyrisk to earnings. The recent resignation of Howard Schultz from thecompany's board of directors also adds some uncertainty to the story.Furthermore, there are no clear drivers on the horizon to suggest thatbusiness will begin to improve, and competitors continue to focus onvalue while traffic to Starbucks stores is flat. While growth in China ispromising, it is not enough to offset weaker trends at home.

The company's most recent quarter was a disappointment as same-store sales in the US came in lower than expectations with weakertrends over the holiday. Even as the demand environment is improv-ing and retailers are cheering about a positive holiday season, SBUXappears to be negatively impacted by a strong value push from exist-ing competitors and the emergence of newer concepts. On the pos-itive side, China grew 6% during the most recent quarter driven bya 6% increase in transactions and is becoming a larger part of theoverall profit mix. Longer-term, China will help the Asia Pacific regioneventually overtake the Americas in importance. However, until thattime, investors will continue to focus on trends in the US, which arelackluster in our view. While valuation is low versus historical averages,it is difficult to argue for multiple expansion given the slowdown insales and earnings growth. We believe SBUX will perform in line withthe sector and, as such, move it to our Bellwether list.



Toll Brothers Inc.: BellwetherJonathan Woloshin, CFA, Head Americas Equities

Toll Brothers, based in Horsham, PA, designs, builds, and markets single-family detached and attached homes in luxuryresidential communities. The company owns and operates golf courses and country clubs associated with master-plannedcommunities.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.72 10,109 9,445.2 6,768

Consensus Forecasts (FY end) Oct 2017 Oct 2018E Oct 2019E

Sales ($M) 5,815 6,993 7,958

Net Income ($M) 535.5 703.6 768.4

First Call EPS ($) 3.19 4.43 4.85

P/E (x) 12.2 8.8 8.1


8 11 1


What drives our opinionDespite TOL's strong management, land position and operations, webelieve this risk profile has worsened based on TOL's focus on veryhigh cost homes, many of which are located in high tax states. Recenttax law changes could disadvantage TOL's product at the expenseof lower cost homes. We continue to believe TOL is a well managedcompany with a solid balance sheet. That said, the company's expo-sure to higher cost homes could put consensus EPS estimates at risk.Risks to our call include rising (falling) interest rates, faster (slower)order growth, increased (decreased) share repurchase, and a sale ofthe company.

We believe TOL has a superior management team, a well located landbase and among the highest gross margins in the sector. This is some-what tempered by TOL's exposure to the California and Seattle mar-kets where, despite strong job growth, affordability is a growing chal-lenge. This, combined with the firm's exposure to the high-rise condobusiness, the risk of softer gross margins, and high investor expecta-tions for the homebuilders, is concerning. The volatility of the City Liv-ing business and an extended relative valuation points to a balancedrisk/reward profile for the shares.



Under Armour Inc.: BellwetherRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

Under Armour is a developer, marketer, and distributor of branded performance products for men, women, and youth. Itdesigns and sells a broad offering of apparel and accessories that utilize a variety of synthetic microfiber fabrications. Thesetechnologically advanced products are designed to wick perspiration away from the skin, help regulate body temperature,enhance comfort and mobility, and improve performance regardless of the weather condition. Under Armour is locatedin Baltimore, MD.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 7,691 4,006.4 6,157


Sales ($M) 4,977 5,177 5,477

EPS (adj.) 0.19 0.18 0.30

P/E (x) 70.1 122.3 73.6


6 15 10


What drives our opinionWe believe UA will perform in line with the sector given its alreadyrich valuation and the lack of material EPS upside. We have a highregard for the Under Armour brand and believe that it has multiplegrowth opportunities moving forward. However, the athletic categoryis much more competitive than just a few years ago and the UA brandis overexposed in North America. We think shares are fairly valuedgiven the stock's current P/E multiple. The risk to our Bellwether viewis an unexpected sustained improvement in outlook or conversely anunexpected worsening outlook.

We believe UA will perform in line with the sector given its already richvaluation. We have a high regard for the Under Armour brand andbelieve that it has multiple future growth opportunities. These includean expansion of its core apparel line through innovation, categoryexpansion (particularly footwear), women's business, direct-to-con-sumer, and international. That said, 2017 was very difficult for UnderArmour as the brand became over-distributed in the US without muchdifferentiation in product. 2018 will likely be another challenging yearas the company works to better segment its brand among various dis-tribution channels. All of this comes as the athletic space has becomeincreasingly competitive, with growth leveling off following severalyears of outperformance. While we are believers in the brand longerterm, we believe the stock is richly valued at 65x consensus 2018EEPS of USD 0.21 even as earnings are expected to decline. As such,we await a better entry point to revisit our stance.



VF Corp: BellwetherRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

VF Corporation, headquartered in Greensboro, NC, is a global branded lifestyle apparel company with more than 30brands. The company's top five brands are North Face, Wrangler, Timberland, Vans, and Lee. Other brands includeJanSport, Eastpak, and Kipling. VFC distributes its products through direct-to-consumer, specialty stores, departmentstores, national chains, and mass merchants.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.30 32,523 9,958.5 29,653


Sales ($M) 12,019 12,332 13,544

EPS (adj.) 3.11 3.13 3.54

P/E (x) 17.2 23.7 23.8


10 11 0


What drives our opinionVFC continues to shift its focus toward higher-margin businesses, andits diverse business model helps to insulate it somewhat from chal-lenges in any one particular category or market. However, the USapparel market remains challenged from the online shift, weak malltraffic, and deflationary trends. Risks to our Bellwether view includea rebound or further slowdown in store traffic and an acceleration ordeceleration in consumer spending.

While we continue to view VF as a "mutual fund" of brands withone of the best-in-class portfolios of outdoor, lifestyle brands in thesector, we cannot ignore the fact that the US apparel market remainsunder pressure from the shift to online spending, weak mall traffic,and deflationary trends. That said, the company continues to shiftits focus toward higher-margin businesses (particularly internationaland direct-to-consumer), and its diverse business model does help toinsulate it somewhat from challenges in any one particular categoryor market. Inventories at North Face were clean coming out of the firstquarter, and the divestiture of Nautica lowers the company's exposureto the US department store channel to a low-single-digit percentageof sales (an underappreciated competitive advantage). We expect thecompany will continue to be acquisitive and highlight its recent dealto acquire the Altra footwear brand from ICON Health & Fitness.



Viacom Inc. (Cl B): BellwetherRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

Viacom operates cable networks and entertainment brands. It owns and operates advertiser-supported basic cabletelevision program services. The company through Paramount Pictures produces, finances and distributes feature motionpictures. Viacom is engaged in music publishing business. Viacom was founded in 1971 and is headquartered in NewYork, NY.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.45 23,266 23,698.0 13,132


Sales ($M) 13,242 13,515 13,242

EPS (adj.) 2.14 2.53 3.02

P/E (x) 34.2 31.5 26.4


7 19 1

Source: Factset, UBS as of 14 June 2017

What drives our opinionAlthough valuation appears attractive and likely limits current poten-tial downside, we are concerned about a continued slowdown inadvertising and additional ratings declines for ad-supported televi-sion. Also, Viacom is overexposed to a younger demographic that ismoving away from television viewing. The risk to our Bellwether viewis an unexpected sustained improvement in outlook or conversely anunexpected worsening outlook.

In our opinion, Viacom finds itself in a difficult position in a worldwhere younger consumers are quickly moving away from traditionaltelevision networks and instead opting for streaming video services(SVOD) like Netflix and YouTube Kids or over-the-top (OTT) offeringssuch as HBO Now. Ratings declines for linear ad-supported kids net-works continue to outpace overall television viewing. And while Via-com does possess some of the most well-known children's networks,including Nickelodeon and MTV, they are very hit-driven (with no bighits recently) and marketers continue to shift spending toward onlineand away from television.



Williams-Sonoma: BellwetherRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

Founded in 1956, Williams-Sonoma, Inc. is the premier specialty retailer of home furnishings and gourmet cookware inthe United States. Furniture represents roughly 30% of the company's total merchandise volume. The company currentlyoperates more than 600 stores in the United States and Canada under the names Williams-Sonoma, Pottery Barn, PotteryBarn Kids, West Elm, and Williams-Sonoma Home, as well as six e-commerce websites and seven direct mail catalogs.WSM is located in San Francisco, CA.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.91 4,532 2,785.7 4,520


Sales ($M) 5,639 5,843 5,639

EPS (adj.) 3.61 4.24 4.39

P/E (x) 12.9 12.7 12.7


3 21 4


What drives our opinionWhile 1Q sales growth was better than expected, margins remainunder pressure largely due to online competition and promotionalintensity. That said, we still think WSM is an omni-channel leader andworthy for inclusion in our e-commerce theme. The greatest risk toour view would likely involve either better- or worse-than-expectedsame-store sales trends.

In our view, Williams-Sonoma will perform in line with the sector.While valuation is not demanding and all of its store concepts grewsales in the fourth quarter, we aren't likely to see much in the wayof near-term multiple expansion given headwinds facing the home-furnishings business, including increased online competition. How-ever, with direct-to-consumer (DTC) revenues accounting for almost50% of WSM's business and e-commerce representing almost 90%of this number, the company has wholeheartedly jumped on boardthe omni-channel train. WSM's DTC business is highly profitable withalmost 22.5% operating margins, and continued channel mix towarde-commerce should help drive this higher. However, the promotionalenvironment has intensified given more competitors in the space (i.e.Wayfair, Homegoods).



Yum! Brands Inc.: BellwetherRobert Samuels, Consumer Discretionary Equity Sector Strategist Americas

YUM! Brands is a fast-food franchiser, trailing only McDonald's in overall sales. It outnumbers the burger giant, however,in store locations, with more than 37,000 units in 100 countries. The company's flagship brands include KFC, Pizza Hut,and Taco Bell.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.17 37,287 5,311.0 27,356


Sales ($M) 5,878 5,596 5,496

EPS (adj.) 2.96 3.41 3.83

P/E (x) 27.6 24.4 21.7


9 13 0


What drives our opinionAfter its separation with Yum China, YUM is a roughly 93% fran-chised business, moving to almost 98% by the end of 2018. Thecompany's China division has now transitioned to a franchisee modelfrom its prior company-operated segment. Without the volatility ofthe Chinese business, "New YUM" is a more stable operating mod-el with significant free cash flow generation. In fact, the company istargeting approximately USD 6.5–7 billion of returns from 2017–19.Risks include changes in consumer spending habits, increased com-petition, and commodity and labor cost pressures.

In our view, YUM will perform in line with the sector. Valuation atcurrent levels appears full, with the stock already trading at similarlevels on EBITDA to other highly franchised restaurant names, includ-ing DNKN and DPZ. Nevertheless, the company now has a much morestable franchise business model with a geographically diverse storebase and additional international growth prospects.



Sector financial highlights - Consumer DiscretionaryName Ticker Rec Price Industry Group Market Market P/E 1 year Dividend

High Low Cap* Cap USD bn forward Yield (%)Aptiv APTV NR 102.61 Automobiles & Components 104.99 80.62 Large 27167.95 18.2 0.99

BorgWarner Inc. BWA NR 48.82 Automobiles & Components 58.22 40.00 Large 10257.18 10.6 1.33

Ford Motor Company F Bellwether 11.89 Automobiles & Components 13.48 10.14 Large 47382.84 7.8 5.05

General Motors Company GM Bellwether 43.57 Automobiles & Components 46.76 33.86 Large 61409.30 6.9 3.49

Goodyear Tire & Rubber Company GT NR 25.10 Automobiles & Components 36.52 24.12 Mid 6019.71 6.5 2.07

Harley-Davidson, Inc. HOG NR 44.20 Automobiles & Components 56.95 39.34 Mid 7356.52 11.8 3.33

Coach, Inc. COH NR 45.53 Consumer Durables & Apparel 55.50 38.70 Large 13104.35 16.2 2.97

D.R. Horton, Inc. DHI Most Preferred 43.08 Consumer Durables & Apparel 53.32 33.25 Large 16259.04 10.1 1.10

Dick's Sporting Goods DKS Bellwether 37.40 Consumer Durables & Apparel 41.61 23.88 Mid 3834.02 12.2 1.97

Garmin Ltd. GRMN NA 61.94 Consumer Durables & Apparel 65.96 49.80 Large 11677.05 19.1 3.29

Hanesbrands Inc. HBI NR 20.17 Consumer Durables & Apparel 25.73 16.38 Mid 7268.66 11.1 2.97

Hasbro, Inc. HAS NR 91.61 Consumer Durables & Apparel 116.20 79.00 Large 11445.57 18.0 2.55

KB Home KBH NR 26.21 Consumer Durables & Apparel 38.80 20.68 Mid 2293.53 10.7 0.38

Leggett & Platt, Incorporated LEG NR 44.25 Consumer Durables & Apparel 53.96 39.57 Mid 5808.70 15.6 3.25

Lennar Corporation LEN Bellwether 53.07 Consumer Durables & Apparel 72.17 49.52 Large 17284.10 9.1 0.30

Mattel, Inc. MAT NR 17.92 Consumer Durables & Apparel 21.67 12.21 Mid 6164.78 #N/A 2.96

MDC MDC Not Rated 31.79 Consumer Durables & Apparel 35.18 26.45 Small 1787.36 8.8 3.34

Michael Kors KORS NR 65.85 Consumer Durables & Apparel 70.00 32.81 Mid 9870.39 14.0 0.00

Mohawk Industries, Inc. MHK NR 214.11 Consumer Durables & Apparel 286.85 202.75 Large 15972.39 13.2 0.00

Newell Rubbermaid Inc. NWL NR 26.39 Consumer Durables & Apparel 55.08 22.60 Large 12817.62 9.5 3.49

NIKE, Inc. Class B NKE Most Preferred 74.70 Consumer Durables & Apparel 75.91 50.35 Large 120393.24 28.1 1.02

PulteGroup, Inc. PHM Most Preferred 30.80 Consumer Durables & Apparel 35.21 23.21 Mid 8794.17 8.7 1.17

PVH Corp. PVH NR 160.24 Consumer Durables & Apparel 169.22 102.81 Large 12352.26 16.8 0.09

Ralph Lauren Corporation RL NR 139.09 Consumer Durables & Apparel 145.94 68.50 Large 11345.99 21.7 1.44

Toll Brothers TOL Bellwether 39.05 Consumer Durables & Apparel 52.73 36.55 Mid 5930.33 8.1 0.90

Under Armour, Inc. UA Bellwether 21.73 Consumer Durables & Apparel 22.58 10.36 Mid 9662.29 91.6 0.00

V.F. Corporation VFC Bellwether 84.03 Consumer Durables & Apparel 84.56 53.57 Large 33146.31 23.3 2.09

Whirlpool Corporation WHR NR 155.47 Consumer Durables & Apparel 200.61 143.11 Large 11006.50 9.2 2.86

Carnival Corporation CCL NR 64.20 Consumer Services 72.70 60.30 Large 47545.75 13.8 2.80

Chipotle Mexican Grill, Inc. CMG NR 460.44 Consumer Services 470.00 247.52 Large 12797.01 46.5 0.00

Darden Restaurants, Inc. DRI NR 92.19 Consumer Services 100.11 76.27 Large 11412.20 17.2 2.73

H&R Block, Inc. HRB NR 23.77 Consumer Services 31.80 23.59 Mid 4972.73 12.3 4.04

Marriott International, Inc. MAR Bellwether 138.75 Consumer Services 149.21 96.90 Large 49028.01 23.3 1.01

MGM Resorts MGM NR 31.43 Consumer Services 38.41 29.53 Large 17499.78 20.5 1.43

McDonald's Corporation MCD Most Preferred 167.05 Consumer Services 178.70 146.84 Large 131163.82 20.9 2.33

Hilton HLT Bellwether 82.93 Consumer Services 88.11 60.54 Large 24913.58 28.6 0.72

Hyatt H Most Preferred 83.00 Consumer Services 84.89 54.38 Mid 9504.30 49.4 0.18

Norwegian Cruise Line Holdings NCLH NR 54.45 Consumer Services 61.48 49.52 Large 12234.32 11.2 0.00

52 week




High Low Cap* Cap USD bn forward Yield (%)52 week

Royal Caribbean Cruises Ltd. RCL NR 113.50 Consumer Services 135.65 101.20 Large 24033.28 12.1 2.01

Starbucks Corporation SBUX Bellwether 57.02 Consumer Services 61.94 52.58 Large 78687.60 21.2 2.02

Wyndham Worldwide Corporation WYN NR 48.28 Consumer Services 127.96 47.21 Mid 4804.44 9.4 4.97

Wynn Resorts, Limited WYNN NR 176.25 Consumer Services 203.63 124.11 Large 19138.46 19.4 1.28

YUM! Brands, Inc. YUM Bellwether 83.38 Consumer Services 88.07 70.90 Large 26949.83 22.9 1.22

CBS Corporation CBS NR 55.12 Media 68.75 47.54 Large 20889.87 10.1 1.31

Comcast Corporation CMCSA Bellwether 33.82 Media 44.00 30.43 Large 155627.61 12.9 1.96

Discovery Communications, Inc. DISCA NR 25.50 Media 27.92 15.99 Large 12347.64 9.8 0.00

Discovery Communications, Inc. DISCK NR 24.15 Media 27.15 14.99 Large 11693.94 9.3 0.00

DISH Network Corp DISH NR 34.08 Media 66.50 28.80 Large 15928.32 14.5 0.00

Gannett Co., Inc. GCI NR 10.35 Media 12.38 7.94 Mid 1168.15 10.2 6.18

Interpublic Group of Companies, Inc. IPG NR 23.58 Media 26.01 18.30 Mid 9090.56 13.1 3.18

Lions Gate Entertainment class A LGF/A Bellwether 25.04 Media 36.48 21.54 Mid 5293.36 48.5 0.36

Lions Gate Entertainment class B LGF/B Not Rated 23.69 Media 34.41 19.97 Mid 5007.97 45.7 0.38

News Corporation NWSA NR 16.02 Media 17.29 12.84 Mid 9338.03 31.3 1.25

Omnicom Group Inc OMC NR 75.37 Media 84.16 65.32 Large 17130.85 13.0 3.05

Scripps Networks Interactive, Inc. SNI NR 90.04 Media 93.58 65.05 #N/A #N/A 15.7 #N/A

TEGNA TGNA NR 11.38 Media 15.60 10.00 Mid 2454.44 7.0 2.46

Time Warner Inc. TWX NR 98.77 Media 103.90 85.88 Large 77269.65 12.1 1.63

Twenty-First Century Fox, Inc. FOXA NR 44.58 Media 44.70 24.81 Large 82586.72 20.1 0.81

Viacom Inc. VIAB Bellwether 28.91 Media 36.77 22.13 Large 11633.53 6.8 2.77

Walt Disney Company DIS Most Preferred 108.75 Media 113.19 96.20 Large 161684.06 14.4 1.49

Amazon.com, Inc. AMZN Most Preferred 1723.86 Retailing 1724.80 927.00 Large 836463.42 109.6 0.00

Advance Auto Parts AAP NR 133.50 Retailing 134.75 78.81 Mid 9883.14 18.9 0.18

AutoZone, Inc. AZO NR 682.99 Retailing 797.89 491.13 Large 18055.52 12.6 0.00

Bed Bath & Beyond Inc. BBBY NR 19.82 Retailing 36.49 16.52 Mid 2775.63 9.2 3.03

Best Buy Co., Inc. BBY NR 73.32 Retailing 79.90 51.61 Large 20485.02 14.5 2.00

CarMax, Inc. KMX NR 73.22 Retailing 77.64 57.05 Large 13038.29 16.0 0.00

Dollar General Corporation DG NR 96.33 Retailing 105.82 65.97 Large 25773.86 15.4 1.11

Dollar Tree, Inc. DLTR NR 88.34 Retailing 116.65 65.63 Large 21005.13 15.1 0.00

Expedia, Inc. EXPE NR 123.58 Retailing 161.00 98.52 Large 18555.29 22.4 0.97

Foot Locker FL NR 57.65 Retailing 59.40 28.42 Mid 6739.80 12.3 2.21

Gap, Inc. GPS Bellwether 31.33 Retailing 35.68 21.02 Large 12139.44 12.0 2.98

Genuine Parts Company GPC NR 94.07 Retailing 107.75 79.86 Large 13803.64 16.4 2.92

Home Depot, Inc. HD Most Preferred 199.67 Retailing 207.61 144.25 Large 230327.33 20.6 1.92

Kohl's Corporation KSS NR 73.28 Retailing 79.92 35.27 Large 12244.79 13.5 3.08

L Brands, Inc. LB NR 35.99 Retailing 63.10 30.70 Mid 9976.57 12.7 6.67

LKQ Corp LKQ NR 33.15 Retailing 43.86 29.60 Large 10266.92 13.7 0.00




High Low Cap* Cap USD bn forward Yield (%)52 week

Lowe's Companies, Inc. LOW Most Preferred 99.16 Retailing 108.98 70.76 Large 80929.83 17.4 1.65

LuLulemon Athletica LULU Bellwether 125.88 Retailing 127.34 51.30 Large 17080.66 37.7 0.00

Macy's Inc M Bellwether 37.56 Retailing 41.33 17.41 Large 11507.29 10.4 4.02

Netflix, Inc. NFLX NR 392.87 Retailing 395.03 144.25 Large 170777.84 107.1 0.00

Nordstrom, Inc. JWN Bellwether 49.87 Retailing 54.00 37.79 Mid 8347.64 14.4 2.97

O'Reilly Automotive, Inc. ORLY NR 281.89 Retailing 287.66 169.43 Large 23090.17 17.5 0.00

Priceline Group Inc PCLN NR 2123.06 Retailing 2228.99 1630.56 Large 102278.42 22.6 0.00

Ross Stores, Inc. ROST NR 84.50 Retailing 86.33 52.85 Large 31817.71 20.0 0.83

Signet SIG NR 55.51 Retailing 77.94 33.11 Mid 3286.36 13.8 2.34

Target Corporation TGT NR 77.22 Retailing 79.59 48.56 Large 41168.68 14.4 3.21

Tiffany & Co. TIF NR 135.67 Retailing 137.97 86.15 Large 16855.78 27.5 1.47

TJX Companies, Inc. TJX NR 94.56 Retailing 95.91 66.44 Large 59295.93 18.9 1.40

Tractor Supply Company TSCO NR 74.32 Retailing 82.68 49.87 Mid 9070.76 17.4 1.51

TripAdvisor, Inc. TRIP NR 57.73 Retailing 58.80 29.50 Mid 7932.33 40.7 0.00

Williams-Sonoma WSM Bellwether 60.85 Retailing 62.48 42.68 Mid 5056.94 14.4 2.63

Ulta Beauty ULTA NR 246.60 Retailing 300.74 187.96 Large 14840.39 21.3 0.00

*Small (<USD 2bn), Mid (USD 2-10bn), Large (>USD 10bn)

Source: Factset, UBS as of 14 Jun 2018



Sector Snapshot - Consumer Discretionary

Autos & ComponentsCons Durables &

Apparel Consumer Services Media Retail SectorWeighting Neutral Most Preferred Most Preferred Neutral Neutral

Key Themes Connected Car e-Commerce Millenials Millenials e-CommerceDisruptive Mobility Millenials Health and Wellness Millenials

Health and Wellness

Performance (%)Absolute1 month 10.1% 6.5% 0.8% 6.6% 8.2% 6.8%3 months 10.7% 5.8% 0.6% 0.4% 10.3% 6.5%6 months 4.5% 6.1% 0.8% -1.3% 31.8% 15.5%12 months 19.5% 13.1% 9.0% -2.0% 49.5% 25.3%

Relative1 month 3.3% -0.2% -6.0% -0.2% 1.4%3 months 4.2% -0.7% -5.9% -6.2% 3.8%6 months -11.0% -9.4% -14.7% -16.8% 16.3%12 months -5.8% -12.1% -16.3% -27.3% 24.2%

No of companies in subsector 6 19 13 15 28 81Subsector market cap (USD m) 151,834.63 286,187.06 421,472.06 602,502.82 1,681,072.27 3,143,068.84Subsector weightings 4.83% 9.11% 13.41% 19.17% 53.49% 100.00%

Top subsector weights (%)

GM 36.2% NKE 33.9% MCD 31.6% DIS 27.1% AMZN 41.2% AMZN 22.0%F 30.6% VFC 9.7% SBUX 19.0% CMCSA 26.0% NFLX 10.1% HD 7.4%

APTV 18.0% DHI 5.1% MAR 9.9% TWX 12.8% BKNG 6.2% NFLX 5.4%BWA 6.4% LEN 5.1% YUM 6.6% CHTR 9.1% LOW 4.9% DIS 5.2%HOG 4.9% MHK 4.7% CCL.U 6.2% FOXA 7.8% TJX 3.6% CMCSA 5.0%GT 4.0% TPR 4.5% HLT 5.6% FOX 3.2% TGT 2.5% MCD 4.2%

0.0% NWL 4.5% RCL 4.6% CBS 3.2% ROST 1.9% BKNG 3.3%PVH 4.3% MGM 3.8% OMC 2.9% DG 1.5% NKE 3.1%HAS 3.6% WYNN 3.5% VIAB 1.7% ORLY 1.4% LOW 2.6%WHR 3.5% DRI 2.7% IPG 1.5% DLTR 1.2% SBUX 2.5%

Source: Factset, UBS as of 14 Jun 2018

Weighting definitions -- Most Preferred: The subsector is expected to outperform the sector benchmark in the next 12 months. Neutral: The subsector is expected to perform broadly in line with the sector benchmark in the next 12 months. Least Preferred: The subsector is expected to underperform the sector benchmark in the next 12 months.



Recent recommendationsCompany Change CommentAmazon.com Inc. Most Preferred We believe the recent pullback in the stock provides us an opportunity

for us to get more positive on the e-commerce bellwether. Weare strong believers in the future growth of e-commerce and cloudcomputing and believe that Amazon will continue to increase its shareof online sales.

D.R. Horton Inc. Most Preferred Well diversified geographically, strong operating leverage, attractivevaluation, best positioned to capture the entry level buyer, a strongbalance sheet and increasing capital efficiency.

Home Depot Inc. Most Preferred HD continues to take share in the home improvement category, is muchbetter positioned with the pro consumer, and is somewhat insulatedfrom online competition.

Hyatt Hotels Corp Most Preferred H trades at a significant forward EV/EBITDA discount to peers, is seekingto monetize more owned assets, and is committed to returning morecapital to shareholders in the form of share repurchases. In addition,improved economic growth and corporate earnings could lead tobetter-than-forecast RevPAR growth. This, in turn, should lead to betteroperating leverage given H's owned hotel profile.

Lowe's Cos. Most Preferred New leadership is likely to reinvigorate the business and help closethe performance gap with Home Depot. We believe valuation looksattractive.

McDonald's Corp. Most Preferred We believe that MCD will outperform the sector as the US business hasbegun to show signs of improvement, and management is taking anaggressive approach to revitalize the business.

Meritage Homes Corp. Most Preferred Exposure to strong job, income and population growth markets,attractive absolute and relative valuation, significant increase inexposure to the entry level buyer (the fastest growth portion of thehousing market) and improving gross and operating margins.

Nike Inc. Most Preferred Nike provides best-in-class exposure to the athletic business, whichcontinues to be the best-performing apparel and footwear category.The company still has a long run ahead of it with respect to sales growthand margin opportunity, in our view.

Pulte Homes Inc. Most Preferred PHM's value creation strategy, combined with solid order growth rates,an increasing focus on first-time buyers, and a significant capital returnprogram, is a significant positive for shareholders. In addition,.despitehaving the highest projected consensus EPS growth rates for 2017 and2018, PHM trades at a P/E discount to its large-cap peers. We believethese factors lead to a favorable risk/reward profile.

Walt Disney Co. Most Preferred We believe Disney has the best product and content lineup in the mediasector with numerous upcoming catalysts, including Star Wars and theopening of Disney Shanghai. We think cable cord-cutting will be a slowbleed and manageable for the company.

Comcast Corp. (Cl A) Bellwether We believe that Comcast will perform in line with the sector givenpositive fundamentals in cable and NBCU, offset by the risks of pay TVsubscriber declines, increased regulation of broadband pricing, and aninability to pass through programming cost increases to consumers.

Dick's Sporting Goods Inc. Bellwether Unfortunately, the top-line bull case on DKS is evaporating witha weaker-than-expected 1Q comp, light 2018 sales guidance, anddisappointing full-year comp guidance. Given the recent bankruptciesin the sporting goods space, we expected sales trends to accelerate,but this does not seem to be happening.



Ford Motor Co Bellwether Ford 's new CEO has taken a number of steps to improve profitabilityover time but has yet to address the company's internationaloperations. We prefer to wait on the sidelines as risk/reward seemsbalanced and it is late in the auto cycle, when automaker stocks tendnot to outperform the consumer discretionary benchmark.

Gap Inc. Bellwether Sales at Old Navy have improved but persistent weakness at the coreGap brand likely limits additional stock upside.

General Motors Bellwether General Motors' sales and profit growth should be aided by its exposureto pickups and SUVs, Margins may improve. However, auto stocks donot typically outperform the consumer discretionary benchmark at thispoint in the economic cycle, so we remain on the sidelines.

Hilton Worldwide Bellwether We see the risk/reward fairly balanced at current levels.

Lennar Corp. (Cl A) Bellwether We see risk/reward fairly balanced at current levels.

Lions Gate Ent Class A Bellwether While we continue to believe that the company is a likely takeovertarget in the media space given its robust content offering, the marketappears to have fallen out of love with media names in general anddoesn't believe in the M&A story.

Lululemon Athletica Bellwether We believe expectations heading into 4Q earnings may be ahead ofthemselves given the recent run-up in the stock price. In addition,valuation is no longer as compelling with the stock currently trading atalmost 1.5x its growth rate from less than 1x late last year. That said,we continue to believe in the margin turnaround story at LULU andwould look to review the shares again on any significant pullback.

Macy's Inc. Bellwether We don't believe the structural issues facing US department stores haveabated, and more difficult comparisons in the back-half of the year area concern. Also, in our view, continued speculation around potentialmonetization of the company's real estate portfolio limits the stock'sdownside.

Marriott International Inc. Bellwether We see the risk/reward fairly balanced at current levels.

Nordstrom Bellwether Lackluster store sales are likely to persist as the shift online continuesto accelerate.

Starbucks Corp. Bellwether Concerns around a slowdown in growth in the US, largely due to newcompetitors and a value push from existing competition, could lead tonegative EPS revisions.

Toll Brothers Inc. Bellwether We see the risk/reward fairly balanced at current levels.

Under Armour Inc. Bellwether We believe that UA will perform in line with the sector given its alreadyrich valuation. However, we are big fans of the Under Armour brandand believe that it has multiple growth opportunities moving forward.

VF Corp Bellwether The US apparel market remains challenged from the online shift, weakmall traffic, and deflationary trends.

Viacom Inc. (Cl B) Bellwether Although valuation appears very attractive and likely limits currentdownside, we are concerned about a continued slowdown inadvertising and additional ratings declines for ad-supported television.Also, VIAB is overexposed to a younger demographic that is movingaway from television viewing.

Williams-Sonoma Bellwether While WSM continues be an omni-channel leader and has some of thebest-in-class e-commerce technologies, sales growth remains sluggishand the competitive environment has intensified. While the companyrecently lowered its full-year guidance, it's difficult to assume thattrends will improve in the near term given heightened promotionalactivity.



Yum! Brands Inc. Bellwether In our view, YUM will perform in line with the sector. Valuation atcurrent levels appears full, with the stock already trading at similarlevels on EBITDA to other highly franchised restaurant names, includingDNKN and DPZ. Nevertheless, the company now has a much morestable franchise business model with a geographically diverse store baseand additional international growth prospects.



Appendix

Appendix

Asset allocation model

Scale for tact ical deviat ion chart s

Symbol Description/Defintion Symbol Description/Defintion Symbol Description/Defintion

+ moderate overweight vs. benchmark moderate underweight vs. benchmark n neutral, i.e., on benchmark

++ overweight vs. benchmark underweight vs. benchmark n/a not applicable

+++ strong overweight vs. benchmark strong underweight vs. benchmark

Source: UBS

USequit y sector allocat ion, in %

For US equity subsector recommendations please see the Equity Preference List or each sector. These reports are published on a monthly basis and

can be found on the Online Services website in the Research > Equities section.

Footnotes1For the first table on this page, the benchmark allocation is based on S&P 500 weights. For the second and third tables on this page, the benchmark allocation refers to

a moderate risk profile and represents the relative market capitalization weights of each country or region.2See Deviations from strategic asset allocation or benchmark allocation n the appendix for an explanation regarding the interpretation of the suggested tactical de-

viations from benchmark. The current olumn refers to the tactical deviation that applies as of the date of this publication. The previous olumn refers to the tacti-

cal deviation that was in place at the date of the previous edition of UBS House View or the last UBS House View Update.3The current allocation column is the sum of the CIO Americas, WM tactical deviation columns and (the S&P 500 benchmark allocation for the first table on this page)

(the benchmark allocation for the second and third tables on this page).

S&P500 CIOAmericas, WM tactical deviation2 CurrentBenchmark Numeric Symbol allocation3

allocation1 Previous Current Previous Current

Consumer Discretionary 12.8 +0.0 +0.0 n n 12.8

Consumer Staples 7.6 -1.0 -1.0 6.6

Energy 5.6 +2.0 +1.0 ++ + 6.6

Financials 15.1 +1.0 +1.0 + + 16.1

Healthcare 13.8 -1.0 -1.0 12.8

Industrials 10.3 +0.0 +0.0 n n 10.3

Information Technology 24.8 +1.0 +1.0 + + 25.8

Materials 2.9 +0.0 +1.0 n + 3.9

Real Estate 2.6 +0.0 +0.0 n n 2.6

Telecom 1.9 +0.0 +0.0 n n 1.9

Utilities 2.7 -2.0 -2.0 0.7

NOTE: The benchmark allocations, as well as the tactical deviations, are intended to be applicable to the US equity portion of a portfolio across investor risk profiles.

Source: UBS CIO WMR, as of 21 February 2018.

Disclosures (15 June 2018)Amazon.com Inc. 1, 2, 3, Comcast Corp. (Cl A) 1, 6, 7, 8, D.R. Horton Inc. 1, 2, 3, Dick's Sporting Goods Inc. 1, 4,5, Ford Motor Co 1, 6, 13, 14, Gap Inc. 1, 2, 3, General Motors 1, 6, 12, Hilton Worldwide 1, 10, 13, 15, HomeDepot Inc. 1, 2, 3, 5, Hyatt Hotels Corp 1, Lennar Corp. (Cl A) 1, 6, Lions Gate Ent Class A 1, Lowe's Cos. 1, 2, 3, 4,5, Lululemon Athletica 1, Macy's Inc. 1, 6, Marriott International Inc. 1, 2, 3, McDonald's Corp. 1, 2, 3, 5, 7, MeritageHomes Corp. 1, Nike Inc. 1, Nordstrom 1, 2, 3, Pulte Homes Inc. 1, 2, 3, Starbucks Corp. 1, 4, 5, 6, 9, Toll BrothersInc. 1, 2, 3, Under Armour Inc. 1, 4, VF Corp 1, 4, 5, Viacom Inc. (Cl B) 1, 2, 3, 17; Walt Disney Co. 1, 2, 3, 5, 7, 8,Williams-Sonoma 1, 4, 16, Yum! Brands Inc. 1, 10, 11,

1. UBS Securities LLC makes a market in the securities and/or ADRs of this company.2. This company/entity is, or within the past 12 months has been, a client of UBS Financial Services Inc, and non-investment banking securities-related services are being, or have been, provided.3. Within the past 12 months, UBS Financial Services Inc has received compensation for products and services otherthan investment banking services from this company.



Appendix

4. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company's common equitysecurities as of last month's end (or the prior month's end if this report is dated less than 10 days after the most recentmonth's end).5. UBS Financial Services Inc., its affiliates or subsidiaries owns a net long position exceeding 0.5% of the total issuedshare capital of this company.6. Within the past 12 months, UBS Securities LLC and/or its affiliates have received compensation for products andservices other than investment banking services from this company/entity.7. The equity analyst covering this company, a member of his or her team, or one of their household members has along common stock position in this company.8. The UBS Wealth Management strategist, a member of his or her team, or one of their household members has along common stock position in this company.9. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securitiesservices are being, or have been, provided.10. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment bankingservices from this company/entity within the next three months.11. UBS Securities LLC is actively providing investment banking services to Yum Brands Inc.12. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investmentbanking securities-related services are being, or have been, provided.13. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment bankingservices from this company/entity or one of its affiliates.14. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investmentbanking services are being, or have been, provided.15. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement ofsecurities of this company/entity or one of its affiliates within the past 12 months.16. UBS Financial Services Inc. its affiliates or subsidiaries owns a net long position exceeding 0.5% of the total issuedshare capital of this company.17. The equity analyst covering this company, a member of his or her team, or one of their household members is anofficer, director, or advisory board member of this company.

Required Disclosures

For a complete set of required disclosures relating to the companies that are the subject of this report, please mail arequest to UBS CIO Americas, Wealth Management Business Management, 1285 Avenue of the Americas, 20th Floor,Avenue of the Americas, New York, NY 10019.

Companies mentioned in this report (15 June 2018):Amazon.com Inc. (AMZN - Most Preferred, $1,723.86), Comcast Corp. (Cl A) (CMCSA - Bellwether, $33.82), D.R.Horton Inc. (DHI - Most Preferred, $43.08), Walt Disney Co. (DIS - Most Preferred, $108.75), Dick's Sporting Goods Inc.(DKS - Bellwether, $37.40), Ford Motor Co (F - Bellwether, $11.89), General Motors (GM - Bellwether, $43.57), GapInc. (GPS - Bellwether, $31.33), Hyatt Hotels Corp (H - Most Preferred, $83.00), Home Depot Inc. (HD - Most Preferred,$199.67), Hilton Worldwide (HLT - Bellwether, $82.93), Nordstrom (JWN - Bellwether, $49.87), Lennar Corp. (Cl A)(LEN - Bellwether, $53.07), Lions Gate Ent Class A (LGF.A - Bellwether, $25.04), Lions Gate Ent Class B (LGF.B - NotRated, $23.69), Lowe's Cos. (LOW - Most Preferred, $99.16), Lululemon Athletica (LULU - Bellwether, $125.88), Macy'sInc. (M - Bellwether, $37.56), Marriott International Inc. (MAR - Bellwether, $138.75), McDonald's Corp. (MCD - MostPreferred, $167.05), Meritage Homes Corp. (MTH - Most Preferred, $46.00), Nike Inc. (NKE - Most Preferred, $74.70),Pulte Homes Inc. (PHM - Most Preferred, $30.80), Starbucks Corp. (SBUX - Bellwether, $57.02), Toll Brothers Inc. (TOL- Bellwether, $39.05), Under Armour Inc. (UA - Bellwether, $21.73), VF Corp (VFC - Bellwether, $84.03), Viacom Inc.(Cl B) (VIA.B - Bellwether, $28.91), Williams-Sonoma (WSM - Bellwether, $60.85), Yum! Brands Inc. (YUM - Bellwether,$83.38)

Analyst certificationEach research analyst primarily responsible for the content of this research report, in whole or in part, certifies that withrespect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflecthis or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be,directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the researchreport.



Appendix

Statement of Risk

Equities - Stock market returns are difficult to forecast because of fluctuations in the economy, investor psychology,geopolitical conditions and other important variables.

Required Disclosures

CIO Americas, Wealth Management equity selection systemEquity sector strategists provide three equity selections: Most Preferred (MP), Least Preferred (LP) and Bellwetherdesignation.

Rating DefinitionsMost Preferred*: The equity sector strategist expects the stock to outperform the relevant benchmark in the next

12 months.

Least Preferred*: The equity sector strategist expects the stock to underperform the relevant benchmark in thenext 12 months.

Bellwether: Stocks that are of high importance or relevance to the sector and which the equity sectorstrategist expects the stock to perform broadly in line with the sector benchmark in the next12 months.

*A stock cannot be selected as Most Preferred if UBS Investment Research rates it a Sell, while a UBS Investment ResearchBuy rated stock cannot be selected as Least Preferred.Restricted: Issuing of research on a company by CIO Americas, WM can be restricted due to legal, regulatory, contractualor best business practice obligations which are normally caused by UBS Investment Bank’s involvement in an investmentbanking transaction in regard to the concerned company.

Equity selection: An assessment relative to a benchmarkEquity selections in Equity Preferences lists (EPLs) are relative assessments versus a sector/industry, country/regional orthematic benchmark. The chosen benchmark is disclosed on the front page of each EPL.Stocks can be selected for several EPLs. To keep consistency, a stock can only be selected as either Most Preferred or LeastPreferred, but not both simultaneously. As benchmarks differ between lists, stocks need not be included on every list towhich they could theoretically be added.



Appendix

Disclaimer

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Version as per April 2018.

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Appendix

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